U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities and Exchange Act of 1934
For the fiscal year ended December 31, 2002
Commission File Number 1-14128
EMERGING VISION, INC.
(Exact name of Registrant as specified in its Charter)
NEW YORK 11-3096941
(State of incorporation) (I.R.S. Employer
Identification Number)
100 Quentin Roosevelt Boulevard
Garden City, NY 11530
Telephone Number: (516) 390-2100
(Address and Telephone Number of
Principal Executive Offices)
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Act.
Yes No X
--- ---
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, as of June 30, 2002, was $1,084,878.
Number of shares outstanding as of March 24, 2003:
29,890,620 shares of Common Stock, par value $0.01 per share
Documents incorporated by reference: None
Part I
Item 1. Business
-----------------
GENERAL
Emerging Vision, Inc. (the "Registrant" and, together with its
subsidiaries, hereinafter the "Company" or "Emerging") is one of the largest
chains of retail optical stores and one of the largest franchise optical chains
in the United States, based upon management's beliefs, domestic sales and the
number of locations of Company-owned and franchised stores (collectively
referred to herein as "Sterling Stores"). The Registrant was incorporated under
the laws of the State of New York in January 1992 and, in July 1992, purchased
substantially all of the assets of Sterling Optical Corp., a New York
corporation then a debtor-in-possession under Chapter 11 of the U.S. Bankruptcy
Code.
In March 2001, the Board of Directors decided that the Company should focus
its efforts and resources on growing its retail optical business and, as a
result, approved a plan to discontinue all other operations then being conducted
by the Company. In connection with this decision, the Company completed its plan
of disposal of substantially all of the net assets of Insight Laser Centers,
Inc. ("Insight Laser") - which operated three laser vision correction centers in
the New York metropolitan area; Insight Laser Centers N.Y.I, Inc. (the
"Ambulatory Center") - owner of the assets of an ambulatory surgery center
located in Garden City, New York; and the yet-to-be-developed Internet Division
- which was to provide a web-based portal being designed to take advantage of
business-to-business opportunities in the optical industry, for which the
Company ceased further development and discontinued the operations thereof.
STORE OPERATIONS
The Company and its franchisees operate retail optical stores under the
trade names "Sterling Optical," "Site For Sore Eyes," "Duling Optical," and
"Singer Specs," although most stores (other than the Company's Site for Sore
Eyes stores located in Northern California) operate under the name "Sterling
Optical." The Company also operates VisionCare of California ("VCC"), a
specialized health care maintenance organization licensed by the State of
California Department of Managed Health Care, which employs licensed
optometrists who render services in offices located immediately adjacent to, or
within, most Sterling Stores located in California.
Most Sterling Stores offer eye care products and services such as
prescription and non-prescription eyeglasses, eyeglass frames, ophthalmic
lenses, contact lenses, sunglasses and a broad range of ancillary items. To the
extent permitted by individual state regulations, an optometrist is employed by,
or affiliated with, most Sterling Stores to provide professional eye
examinations to the public. The Company fills prescriptions from these employed
or affiliated optometrists, as well as from unaffiliated optometrists and
ophthalmologists. Most Sterling Stores have an inventory of ophthalmic and
contact lenses, as well as on-site lab equipment for cutting and edging
ophthalmic lenses to fit into eyeglass frames, which, in many cases, allows
Sterling Stores to offer same-day service.
Occasionally, the Company sells the assets of certain of its Company-owned
stores to qualified franchisees, and, in certain instances, realizes a profit on
the conveyance of the assets of such stores. Through these sales, along with the
opening of new stores by qualified franchisees, the Company seeks to create a
stream of royalty payments based upon a percentage of the gross revenues of the
franchised locations, and grow both the Sterling Optical and Site For Sore Eyes
brand names. The Company currently derives its retail optical store revenues
principally from the sale of eye care products and services at Company-owned
stores, and ongoing royalty fees based upon a percentage of the gross revenues
of its franchised stores.
As of December 31, 2002, there were 182 Sterling Stores in operation,
consisting of 23 Company-owned stores (including 8 stores being managed by
franchisees), and 159 franchised stores. The Company currently seeks to focus on
expanding its franchised store operations. Sterling Stores are located in 23
states, the District of Columbia, Canada, and the U.S. Virgin Islands.
Page -2-
The following chart sets forth the breakdown of Sterling Stores in
operation as of December 31, 2002 and 2001:
December 31,
2002(*) 2001
-------- --------
I. COMPANY-OWNED STORES:
--------------------
Company-owned stores......................... 15 25
Company-owned stores managed by franchisees.. 8 9
---- ----
Total.................. 23 34
==== ====
(*)Existing store locations: California (2), Iowa (1), Minnesota (1),
Nebraska (1), New York (14), North Dakota (1), Pennsylvania (1), and Wisconsin
(2).
II. FRANCHISED STORES:
-----------------
Franchised stores.......................... 159 168
Franchised stores managed by the Company... - 1
---- ----
Total.................. 159 169
==== ====
(*)Existing store locations: California (28), Colorado (1), Connecticut
(1), Delaware (6), Florida (1), Illinois (2), Kentucky (2), Maryland (17),
Massachusetts (1), Minnesota (1), Montana (1), Nevada (1), New Jersey (8), New
York (42), North Dakota (5), Ontario, Canada (2), Pennsylvania (15), South
Dakota (1), Texas (1), Virginia (8), Washington, D.C. (2), West Virginia (1),
Wisconsin (10), and the U.S. Virgin Islands (2).
Sterling Stores generally range in size from approximately 1,000 square
feet to 2,000 square feet, are similar in appearance and are operated under
certain uniform standards and operating procedures. Many Sterling Stores are
located in enclosed regional shopping malls and smaller strip centers; however,
some Sterling Stores are located on the ground floor of office buildings or
other commercial structures, with a limited number of Sterling Stores being
housed in freestanding buildings with adjacent parking facilities. Sterling
Stores are generally clustered within geographic market areas to maximize the
benefit of advertising strategies and minimize the cost of supervising
operations.
In response to the eyewear market becoming increasingly fashion-oriented
during the past decade, most Sterling Stores carry a large selection of designer
eyeglass frames. The Company continually test-markets various brands of
sunglasses, ophthalmic lenses, contact lenses and ophthalmic frames. Small
quantities of these items are usually purchased for selected stores that test
customer response and interest. If a product test is successful, the Company
attempts to negotiate a system-wide preferred vendor discount for the product in
an effort to maximize system-wide sales and profits.
FRANCHISE SYSTEM
An integral part of the Company's franchise system includes providing what
the Company believes to be a high level of marketing, financial, training and
administrative support to its franchisees. The Company provides "grand opening"
assistance for each new franchised location by consulting with its franchisees
with respect to store design, fixture and equipment requirements and sources,
inventory selection and sources, and marketing and promotional programs, as well
as assistance in obtaining managed care contracts. Specifically, the Company's
grand opening assistance helps to establish business plans and budgets, provides
preliminary store designs and plan approval prior to construction of a
franchised store, and provides training, an operations manual and a
comprehensive business review to aid the franchisee in attempting to maximize
its sales and profitability. Further, on an ongoing basis, the Company provides
training through regional seminars, offers assistance in marketing and
advertising programs and promotions, and consults with its franchisees as to
their management and operational strategies and business plans.
Page -3-
Preferred Vendor Network. With the collective buying power of Company-owned
and franchised Sterling Stores, the Company has established a network of
preferred vendors (the "Preferred Vendors") whose products may be purchased
directly by franchisees at group discount prices, thereby providing such
franchisees with the opportunity for higher gross margins. Additionally, the
Company negotiates and executes cooperative advertising programs with its
Preferred Vendors for the benefit of all Company-owned and franchised stores.
Franchise Agreements. Each franchisee enters into a franchise agreement
(the "Franchise Agreement") with the Company, the material terms of which
generally are as follows:
a. Term. Generally, the term of each Franchise Agreement is ten years and,
subject to certain conditions, is renewable at the option of the franchisee.
b. Initial Fees. Generally, franchisees (except for any franchisees
converting their existing retail optical store to a Sterling Store (a "Converted
Store"), and those entering into agreements for more than one location) must pay
the Company a non-recurring, initial franchise fee of $20,000. The Company
charges each franchisee of a Converted Store a non-recurring, initial franchise
fee of $10,000 per location. For each franchisee entering into agreements for
more than one location, the Company charges a non-recurring, initial franchise
fee of $15,000 for the second location, and $10,000 for each location in excess
of two.
c. Ongoing Royalties. Franchisees are obligated to pay the Company ongoing
royalties in an amount equal to a percentage (generally 8%) of the gross
revenues generated by their Sterling Store. Franchisees of Converted Stores,
however, pay ongoing royalties, on their store's historical average base sales,
at reduced rates increasing (in most cases) from 2% to 6% for the first three
years of the term of the Franchise Agreement. In addition, most of the Franchise
Agreements acquired by the Company from Singer Specs, Inc. (the "Singer
Franchise Agreements") provide for ongoing royalties calculated at 7% of gross
revenues. Franchise Agreements entered into prior to January 1994 provide for
the payment of ongoing royalties on a monthly basis, while those entered into
after January 1994 provide for their payment on a weekly basis, in each case,
based upon the gross revenues for the preceding period. Gross revenues generally
include all revenues generated from the operation of the Sterling Store in
question, excluding refunds to customers, sales taxes, a limited amount of bad
debts and, to the extent required by state law, fees charged by independent
optometrists.
d. Advertising Fund Contributions. Most franchisees must make ongoing
contributions to an advertising fund (the "Advertising Fund") equal to a
percentage of their store's gross revenues. Except for the Singer Franchise
Agreements, which generally provide for contributions equal to 7% of gross
revenues, for Franchise Agreements entered into prior to August 1993, the rate
of contribution is generally 4% of the store's gross revenues, while Franchise
Agreements entered into after August 1993 generally provide for contributions
equal to 6% of the store's gross revenues. Generally, 50% of these funds are
expended at the direction of each individual franchisee (for the particular
Sterling Store in question), with the balance being expended on joint
advertising campaigns for all franchisees located within specific geographic
areas.
e. Financing. In the past, the Company has financed a majority of the
acquisition price of the assets (other than inventory) of Company-owned stores
sold to franchisees, to be repaid over a period of seven years, together with
interest at the rate of 12% per annum. The Company generally does not finance
the initial, non-recurring franchise fee or rent security deposits, which are
generally required under a franchisee's sublease. The purchase price is
generally based upon the historical and projected cash flow of the Sterling
Store in question. However, the Company has, on occasion, financed (and may in
the future finance) up to 100% of the acquisition price of a franchised store.
Substantially all such financing is personally guaranteed by the franchisee (or,
if a corporation, by the principals owning in excess of an aggregate of 51%
thereof) and is generally secured by all of the assets of the Sterling Store in
question, including subsequently acquired assets and the proceeds thereof. From
time to time, certain franchisees obtain financing from third parties. In such
cases, the Company generally subordinates its security interest in the assets of
the franchised location to the security interests granted to the provider of
such financing.
f. Termination. Franchise Agreements may be terminated if the franchisee
has defaulted on its payment of monies due to the Company, or in its performance
of the other terms and conditions of the Franchise Agreement. During 2002, ten
franchised stores were closed, and the assets of (as well as possession of) an
additional 4 franchise stores were reacquired by the Company. Substantially all
of the assets located in such stores were voluntarily surrendered and
transferred back to the Company in connection with the termination of the
related Franchise Agreements. In such instances, it is generally the Company's
intention to re-convey the assets of such a store to a new franchisee, requiring
the new franchisee to enter into the Company's then current form of Franchise
Agreement.
Page -4-
MARKETING AND ADVERTISING
The Company's marketing strategy emphasizes professional eye examinations,
competitive pricing (primarily through product promotions), convenient
locations, excellent customer service, customer-oriented store design and
product displays, knowledgeable sales associates, and a broad range of quality
products, including privately-labeled contact lenses and lens cleaning solutions
presently being offered by the Company and certain of its franchisees.
Examinations by licensed optometrists are generally available on the premises
of, or directly adjacent to, substantially all Sterling Stores.
The Company continually prepares and revises its in-store,
point-of-purchase displays, which provide various promotional messages to
customers upon their arrival at Sterling Stores. Both Company-owned and most
franchised Sterling Stores participate in advertising and in-store promotions,
which include visual merchandising techniques to draw attention to the products
displayed in the Sterling Store in question. The Company is also continually
refining its interactive web site, which further markets the "Sterling Optical"
and "Site for Sore Eyes" brands in an effort to increase traffic to its stores
and, in many instances, also uses direct mail advertising to reach prospective,
as well as existing, consumers.
The Company annually budgets approximately 4% to 6% of system-wide sales
for advertising and promotional expenditures. Generally, franchisees are
obligated to contribute a percentage of their Sterling Store's gross revenues to
the Company's segregated advertising fund accounts, which the Company maintains
for advertising, promotional and public relations programs. In most cases, the
Company permits each franchisee to direct the expenditure of approximately 50%
of such contributions, with the balance being expended to advertise and promote
all Sterling Stores located within the geographic area of the Sterling Store in
question, and/or on national promotions and campaigns.
INSIGHT MANAGED VISION CARE
Managed care is a substantial and growing segment of the retail optical
business. Under the trade name "Insight Managed Vision Care," the Company
promotes the use of its Sterling Stores through the ongoing development of its
managed care network. The Company, through Insight Managed Vision Care,
contracts with payors (e.g. health maintenance organizations, preferred provider
organizations, insurance companies, Taft-Hartley unions, and mid-sized to large
companies) that offer eye care benefits to their covered participants. When
Sterling Stores provide services or products to a covered participant, it is
generally at a discount from the everyday advertised retail price. Typically,
participants will be eligible for greater eye care benefits at Sterling Stores
than those offered at eye care providers that are not participating in a managed
care program. The Company believes that the additional customer traffic
generated by covered participants, along with purchases by covered participants
above and beyond their eye care benefits, more than offsets the reduced gross
margins being realized on these sales. The Company believes that convenience of
store locations and hours of operation are key factors in attracting managed
care business. As the Company increases its presence within markets it has
already entered as well as expands into new markets, it believes it will be more
attractive to managed care payors due to the additional Sterling Stores being
operated by the Company and its franchisees.
COMPETITION
The optical business is highly competitive and includes chains of retail
optical stores, superstores, individual retail outlets, the operators of web
sites and a large number of individual opticians, optometrists and
ophthalmologists who provide professional services and may, in connection
therewith, dispense prescription eyewear. As retailers of prescription eyewear
generally service local markets, competition varies substantially from one
location or geographic area to another. Since 1994, certain major competitors of
the Company have been offering promotional incentives to their customers and, in
response thereto, the Company generally offers the same or similar incentives to
its customers.
The Company believes that the principal competitive factors in the retail
optical business are convenience of location, on-site availability of
professional eye examinations, rapid service, quality and consistency of product
and service, price, product warranties, a broad selection of merchandise and the
participation in third-party, managed care provider programs. The Company
believes that it competes favorably in each of these areas.
Page -5-
GOVERNMENT REGULATION
The Company and its operations are subject to extensive federal, state and
local laws, rules and regulations affecting the health care industry and the
delivery of health care, including laws and regulations prohibiting the practice
of medicine and optometry by persons not licensed to practice medicine or
optometry, prohibiting the unlawful rebate or unlawful division of fees and
limiting the manner in which prospective patients may be solicited. The
regulatory requirements that the Company must satisfy to conduct its business
will vary from state to state. In particular, some states have enacted laws
governing the ability of ophthalmologists and optometrists to enter into
contracts to provide professional services with business corporations or lay
persons, and some states prohibit the Company from computing its continuing
royalty fees based upon a percentage of the gross revenues of the fees collected
by affiliated optometrists. Various federal and state regulations limit the
financial and non-financial terms of agreements with these health care
providers; and the revenues potentially generated by the Company differ among
its various health care provider affiliations.
The Company is also subject to certain regulations adopted under the
Federal Occupational Safety and Health Act with respect to its in-store
laboratory operations. The Company believes that it is in material compliance
with all such applicable laws and regulations.
As a franchisor, the Company is subject to various registration and
disclosure requirements imposed by the Federal Trade Commission and by many
states in which the Company conducts franchising operations. The Company
believes that it is in material compliance with all such applicable laws and
regulations.
ENVIRONMENTAL REGULATION
The Company's business activities are not significantly affected by
environmental regulations, and no material expenditures are anticipated in order
for the Company to comply with any such environmental regulations. However, the
Company is subject to certain regulations promulgated under the Federal
Environmental Protection Act with respect to the grinding, tinting, edging and
disposal of ophthalmic lenses and solutions, which the Company believes it is in
material compliance with.
EMPLOYEES
As of March 24, 2003, the Company employed approximately 160 individuals,
of which approximately 77% were employed on a full-time basis. Except for those
individuals employed at Company-owned Sterling Stores located in the New York
metropolitan area, and except for those individuals employed by the Registrant's
wholly-owned subsidiary, Insight IPA of New York, Inc. (which solicits managed
care provider agreements in the State of New York), of which there were none, no
employees are covered by any collective bargaining agreement. The Company
considers its labor relations with its associates to be in good standing and has
not experienced any interruption of its operations due to disagreements.
Additionally, the Company has an employment agreement with one of its key
executives.
Page -6-
Item 2. Properties
-------------------
The Company's headquarters, consisting of approximately 7,000 square feet,
are located in an office building situated at 100 Quentin Roosevelt Boulevard,
Garden City, New York 11530, under a sublease that expires in November 2006.
This facility houses the Company's principal executive and administrative
offices.
The Company leases the space occupied by all of its Company-owned Sterling
Stores and the majority of its franchised Sterling Stores. The remaining leases
for its franchised Sterling Stores are held in the names of the respective
franchisees thereof.
Sterling Stores are generally located in commercial areas, including major
shopping malls, strip centers, freestanding buildings and other areas conducive
to retail trade. Generally, Sterling Stores range in size from 1,000 to 2,000
square feet.
Page -7-
Item 3. Legal Proceedings
--------------------------
Information with respect to the Company's legal proceedings required by
Item 103 of Regulation S-K is set forth in Note 12 to the Consolidated Financial
Statements included in Item 8 of this Report, and is incorporated by reference
herein.
Page -8-
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
There were no matters submitted to a vote by the Company's shareholders
during the fourth quarter ended December 31, 2002.
Page -9-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
------------------------------------------------------------------------------
The Registrant's Common Stock was listed on the OTC Bulletin Board under
the trading symbol "ISEE.OB" as of August 23, 2001, and was previously listed on
the Nasdaq National Market System. Over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. The range of the high and low closing
sales prices for the Registrant's Common Stock for each quarterly period of the
last two years, is as follows:
2002 2001
------------------ ------------------
Quarter Ended: High Low High Low
-------------- ------- ------- ------- -------
March 31 $0.14 $0.07 $0.72 $0.22
June 30 $0.11 $0.05 $0.37 $0.19
September 30 $0.10 $0.04 $0.80 $0.13
December 31 $0.10 $0.03 $0.14 $0.06
The approximate number of shareholders of record of the Company's Common
Stock as of March 24, 2003, was 300.
There was one shareholder of record of the Company's Senior Convertible
Preferred Stock as of March 24, 2003.
Historically, the Company has not paid dividends on its Common Stock, and
has no intention to pay dividends on its Common Stock in the foreseeable future.
It is the present policy of the Registrant's Board of Directors to retain
earnings, if any, to finance the Company's operations and expansion.
Page -10-
Item 6. Selected Financial Data
--------------------------------
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following Selected Financial Data has been derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with those statements, which are included in this Report. The
consolidated financial statements have been examined and reported on by Arthur
Andersen LLP, independent public accountants, with respect to the years ended
December 31, 2001, 2000, 1999 and 1998. The consolidated financial statements
for the year ended December 31, 2002 were audited by Miller Ellin & Company LLP,
independent public accountants.
(In thousands, except for per share data)
Year Ended December 31,
----------------------------------------------------------------------
Statement of Operations Data: 2002 2001 2000 1999 1998
------------- ------------- -------------- ------------- -------------
System-wide sales (1) $ 104,448 $ 124,589 $ 128,775 $ 140,321 $ 147,402
========== ========== ========== ========== ==========
Total revenues $ 17,425 $ 20,619 $ 23,058 $ 29,580 $ 32,582
========== ========== ========== ========== ==========
Loss from continuing operations $ (4,721) $ (5,088) $ (14,628) $ (2,691) $ (16,016)
========== ========== ========== ========== ==========
Income (loss) from discontinued operations $ 74 $ 1,312 $ (15,533) $ 430 $ (956)
========== ========== ========== ========== ==========
Loss on disposal of discontinued operations $ - $ - $ (8,831) $ - $ -
========== ========== ========== ========== ==========
Net loss $ (4,647) $ (3,776) $ (38,992) $ (2,261) $ (17,777)
========== ========== ========== ========== ==========
Per Share Information - basic and diluted
-----------------------------------------
Loss from continuing operations $ (0.17) $ (0.19) $ (2.04) $ (0.41) $ (1.10)
========== ========== ========== ========== ==========
Income (loss) from discontinued operations $ 0.01 $ 0.05 $ (0.66) $ 0.03 $ (0.07)
========== ========== ========== ========== ==========
Loss on disposal of discontinued operations $ - $ - $ (0.37) $ - $ -
========== ========== ========== ========== ==========
Net loss per share $ (0.16) $ (0.14) $ (3.07) $ (0.38) $ (1.23)
========== ========== ========== ========== ==========
Weighted-average common shares outstanding 28,641 26,409 23,627 15,232 14,627
========== ========== ========== ========== ==========
Balance Sheet Data:
-------------------
Working capital deficit $ (4,632) $ (1,011) $ (3,987) $ (4,795) $ (3,351)
Total assets 6,650 11,057 22,531 30,312 32,685
Total debt 1,494 1,299 754 7,347 9,751
Quarterly Data:
---------------
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- ---------------- --------------- ----------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Net revenues $ 4,802 $ 5,464 $ 3,936 $ 5,288 $ 4,807 $ 5,006 $ 3,880 $ 4,895
Net loss from continuing
operations $ (533) $ (41) $ (397) $ (57) $ (1,895) $ (1,942) $ (1,896) $ (3,048)
Income (loss) from discontinued
operations $ - $ 431 $ (120) $ 1,064 $ 287 $ (657) $ (93) $ 474
Net income (loss) $ (533) $ 390 $ (517) $ 1,007 $ (1,608) $ (2,599) $ (1,989) $ (2,574)
Page -11-
Sterling Store Data: (In thousands, except for number of stores)
Year Ended December 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
Company-owned stores bought, opened or reacquired 4 15 3 11 6
Company-owned stores sold or closed (14) (10) (13) (16) (21)
Company-owned stores at end of period 15 25 20 30 35
Company-owned stores being managed by Franchisees at end
of period 8 9 12 6 6
Franchised stores being managed by Company at end of period - 1 3 5 12
Franchised stores at end of period 159 169 201 218 251
Average sales per store (2):
Company-owned stores $ 337 $ 377 $ 396 $ 420 $ 478
Franchised stores $ 591 $ 564 $ 546 $ 495 $ 475
Average franchise royalties per franchised store (2) $ 47 $ 43 $ 42 $ 38 $ 35
(1) System-wide sales represent combined retail sales generated by
Company-owned and franchised stores, as well as revenues generated by VCC.
(2) Average sales per store and average franchise royalties per franchised
store are computed based upon the weighted-average number of Company-owned and
franchised stores in operation, respectively, for each of the specified periods.
For periods of less than a year, the averages have been annualized.
Page -12-
Item 7. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------------
Results of Operations
---------------------
This Report contains certain forward-looking statements and information
relating to the Company that is based on the beliefs of the Company's
management, as well as assumptions made by, and information currently available
to, the Company's management. When used in this Report, the words "anticipate",
"believe", "estimate", "expect", and similar expressions, as they relate to the
Company or the Company's management, are intended to identify forward-looking
statements. Such statements reflect the current view of the Company with respect
to future events, are not guarantees of future performance and are subject to
certain risks and uncertainties. These risks and uncertainties may include:
product demand and market acceptance risks; the effect of economic conditions;
the impact of competitive products, services and pricing; product development,
commercialization and technological difficulties; the outcome of current and
future litigation; and other risks described elsewhere herein. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, or expected. The Company
does not intend to update these forward-looking statements.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Net sales for Company-owned stores, including revenues generated by VCC, a
specialized health care maintenance organization licensed by the State of
California Department of Managed Health Care, decreased by $1,742,000, or 15.0%,
to $9,906,000 for the year ended December 31, 2002, as compared to $11,648,000
for the comparable period in 2001. The decrease in net sales was a direct result
of management's commitment to continue to close non-profitable Company-owned
stores. There were 15 stores being operated by the Company as of December 31,
2002, compared to 25 stores as of December 31, 2001. On a same store basis (for
stores that operated as a Company-owned store during the entirety of both of the
years ended December 31, 2002 and 2001), comparative net sales decreased by
$377,000, or 8.2%, to $4,204,000 for the year ended December 31, 2002, as
compared to $4,581,000 for the comparable period in 2001. Management believes
this decrease was primarily a result of the struggling U.S. economy, combined
with continuing national threats that significantly impacted the New York area,
in which most of our Company-owned stores operate.
Franchise royalties decreased by $1,044,000, or 13.3%, to $6,816,000 for
the year ended December 31, 2002, as compared to $7,860,000 for the comparable
period in 2001. This decrease was a result of the fact that there were fewer
franchised stores in operation during 2002 as compared to 2001. As of December
31, 2002, there were 159 franchised stores in operation, as compared to 169 as
of December 31, 2001. Additional factors driving the decrease were the
struggling U.S. economy, and certain other out of the ordinary threats and
incidents that took place in areas of the United States in which a large number
of our franchise stores operate, including New York, Maryland, Virginia,
Washington D.C., and California, which significantly affected retail traffic in
those areas.
Net gains on the conveyance of Company-store assets to franchisees, and
other franchise related fees (which includes initial franchise fees, renewal
fees and fees related to the transfer of store ownership from one franchisee to
another) decreased by $69,000, or 49.3%, to $71,000 for the year ended December
31, 2002, as compared to $140,000 for the comparable period in 2001. This
decrease was a direct result of a lower amount of initial franchise, transfer
and renewal fees for the year ended December 31, 2002, as compared to the
comparable period in 2001. The Company did not convey the assets of any of its
Company-owned stores to franchisees during 2002 or 2001.
Interest on franchise notes receivable decreased by $635,000, or 67.1%, to
$312,000 for the year ended December 31, 2002, as compared to $947,000 for the
comparable period in 2001. This decrease was principally due to several
franchise notes maturing during 2002, along with the fact that certain of the
Company's franchisees filed bankruptcy or experienced other significant personal
financial difficulties, leaving them unable to fulfill their commitment under
their respective promissory notes to the Company.
Other income increased by $262,000, to $320,000, for the year ended
December 31, 2002, as compared to $58,000 for the comparable period in 2001.
This increase was primarily a result of the sale of certain assets of the
Company to third parties, along with the settlement of certain existing
liabilities at lesser amounts than anticipated.
The Company's gross profit margin increased by 3.4%, to 77.0% for the year
ended December 31, 2002, as compared to 73.6% for the comparable period in 2001.
This increase was a result of improved inventory management and control,
improved purchasing at lower average product costs, and improved discounts
obtained in 2002 from certain of the Company's vendors. In the future, the
Company's gross profit margin may fluctuate depending upon the extent and timing
of changes in the product mix in Company-owned stores, competitive pricing, and
promotional incentives.
Page -13-
Selling, general and administrative expenses decreased by $1,797,000, or
8.8%, to $18,564,000 for the year ended December 31, 2002, as compared to
$20,361,000 for the comparable period in 2001. This decrease was primarily due
to management's continuing plans to reduce administrative expenses, and to close
non-profitable Company-owned stores. Included were reductions in salaries and
related expenses of $2,216,000, facility and other overhead charges of $263,000,
and depreciation and amortization of $863,000. These items were offset by a
$1,691,000 increase in the provision for doubtful accounts related to certain
franchise receivables and notes that management deemed uncollectible due to,
among other reasons, certain of the Company's franchisees filing bankruptcy or
experiencing other significant personal financial difficulties, leaving them
unable to fulfill their financial obligations to the Company. A smaller portion
of this provision related to certain managed care receivables that were deemed
uncollectible.
Provision for store closings decreased by $44,000, to $920,000, for the
year ended December 31, 2002, as compared to $964,000 for the comparable period
in 2001. In 2002, management made the decision to close an additional 15 of its
Company-owned stores. In connection therewith, the Company recorded a provision
based on the estimated costs (including lease termination costs and other
expenses) that will be incurred in the closing of the stores.
Non-cash charges for the issuance of warrants and induced conversions of
warrants decreased by $165,000, or 100.0%, for the year ended December 31, 2002,
from the comparable period in 2001. This decrease was due to the fact that there
were no non-cash charges related to warrants or induced conversions during 2002.
The Company does, however, have outstanding contingent warrants that become
exercisable upon the achievement, by the Company, of certain predetermined
EBITDA targets. Due to these contingencies, the future valuation of the
contingent warrants, if and when they become exercisable, will result in charges
to the Company's results of operations in future periods. The significance of
these charges, if any, will be dependent upon the fair market value of the
Company's common stock at the time that the respective EBITDA targets are
achieved.
Loss from the operation of franchised stores managed by the Company
decreased by $167,000, or 100.0%, for the year ended December 31, 2002, from the
comparable period in 2001. The Company did not manage any stores on behalf of
franchisees during 2002, and has no intention of doing so in the future.
Interest expense increased by $130,000, or 168.8%, to $207,000 for the year
ended December 31, 2002, as compared to $77,000 for the comparable period in
2001. This increase was a direct result of interest paid, during 2002, in
connection with $2,000,000 in financing arrangements obtained by the Company in
January 2002.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Net sales for Company-owned stores, including revenues generated by VCC, a
specialized health care maintenance organization licensed by the State of
California Department of Managed Health Care, decreased by $467,000, or 3.9%, to
$11,648,000 for the year ended December 31, 2001, as compared to $12,115,000 for
the comparable period in 2000. On a same store basis (for stores that operated
as a Company-owned store during the entirety of both of the years ended December
31, 2001 and 2000), comparative net sales decreased by $1,043,000, or 14.5%, to
$6,129,000 for the year ended December 31, 2001, as compared to $7,172,000 for
the comparable period in 2000. While, on average, there were more Company-owned
stores in operation during 2001 as compared to 2000, the Company experienced a
decline in sales during the last quarter of 2001. Management believes that this
decline was a direct result of the general economic downturn experienced as a
result of the tragic events of September 11, 2001, especially in light of the
fact that the nearly 50% of Company-owned stores operate in the State of New
York.
Franchise royalties decreased by $1,217,000, or 13.3%, to $7,860,000 for
the year ended December 31, 2001, as compared to $9,077,000 for the comparable
period in 2000. This decrease was a result of the fact that there were fewer
franchised stores in operation during 2001 as compared to 2000. As of December
31, 2001, there were 169 franchised stores in operation, as compared to 201 as
of December 31, 2000.
Net gains and fees on the conveyance of Company-owned store assets to
franchisees (which includes renewal fees and the fees related to the transfer of
store ownership from one franchisee to another) decreased by $158,000, or 53.0%,
to $140,000 for the year ended December 31, 2001, as compared to $298,000 for
the comparable period in 2000. This decrease was due to the fact that the
Company did not convey to franchisees (and thus did not realize a gain on) any
assets of Company-owned stores during the year ended December 31, 2001. In 2000,
however, the Company conveyed the assets of three Company-owned stores to
franchisees. The $140,000 reflected for the year ended December 31, 2001 relates
solely to transfer and renewal fees.
Interest on franchise notes receivable decreased by $263,000, or 21.7%, to
$947,000 for the year ended December 31, 2001, as compared to $1,210,000 for the
comparable period in 2000. This decrease was principally due to the fact that
several franchise notes matured during 2001.
Page -14-
Other income decreased by $300,000, or 83.8%, to $58,000 for the year ended
December 31, 2001, as compared to $358,000 for the comparable period in 2000.
This decrease was primarily a result of a decrease in the amount of interest
income earned by the Company, due to lower average cash balances on hand in its
banks during 2001, as compared to 2000.
The Company's gross profit margin increased by 5.5%, to 73.6% for the year
ended December 31, 2001, as compared to 68.1% for the comparable period in 2000.
This increase was a result of improved inventory management and control,
improved purchasing at lower average product costs, and better discounts
obtained in 2001 from certain of the Company's vendors. In the future, the
Company's gross profit margin may fluctuate depending upon the extent and timing
of changes in the product mix in Company-owned stores, competitive pricing, and
promotional incentives.
Selling, general and administrative expenses decreased by $11,870,000, or
36.6%, to $20,361,000 for the year ended December 31, 2001, as compared to
$31,260,000 for the comparable period in 2000. This decrease was primarily due
to the fact that the Company recorded increased charges of $10,260,000 for the
year ended December 31, 2000, related to the Company's provision for doubtful
accounts associated with accounts and notes receivable due from franchisees,
along with certain receivables from franchisees for advertising expenditures
that the Company incurred on their behalf, while the Company incurred no such
charges for the year ended December 31, 2001. As discussed in prior year, the
increased charges in 2000 were a direct result of a change in management
philosophy, policy, direction, and related courses of action resulting from a
change in the Company's senior management personnel subsequent to December 31,
2000, to take back franchise stores and/or reevaluate notes receivable due from
various problem franchisees. During 2001, the Company did not incur similar
charges, as management more closely monitored and managed its franchise
receivables and notes. Additionally, due to corporate downsizing and improved
scheduling in its Company-owned stores, the Company reduced salary and related
expenses by approximately $1,500,000. Finally, there was a decrease in
depreciation and amortization of approximately $350,000 due to the full
depreciation in the prior year of certain of the Company's property and
equipment.
Provision for store closings was $964,000 for the year ended December 31,
2001. No such provision was provided for the year ended December 31, 2000. In
2001, management made the decision to close 11 of its Company-owned stores. In
connection therewith, the Company recorded a provision based on the expected net
proceeds, if any, to be generated from the disposition of the store's assets, as
compared to the carrying value (after consideration of impairment, if any) of
such store's assets and the estimated costs (including lease termination costs
and other expenses) that will be incurred in the closing of the stores.
Non-cash charges for issuance of warrants and induced conversion of
warrants decreased by $201,000, or 54.9%, to $165,000 for the year ended
December 31, 2001, from $366,000 for the comparable period in 2000. This
decrease was principally due to the fact that there were no induced conversions
of warrants during 2001. The 2001 charges relate solely to the issuance of
common shares in consideration for consulting services. Furthermore, the Company
has outstanding contingent warrants that become exercisable upon the
achievement, by the Company, of certain predetermined EBITDA targets. Due to
these contingencies, the future valuation of the contingent warrants, if and
when they become exercisable, will result in charges to the Company's results of
operations in future periods. The significance of these charges, if any, will be
dependent upon the fair market value of the Company's common stock at the time
that the respective EBITDA targets are achieved.
Loss from the operation of franchised stores managed by the Company
decreased by $460,000, or 73.4%, to approximately $167,000 for the year ended
December 31, 2001, as compared to approximately $627,000 for the comparable
period in 2000. As of December 31, 2001, there was only one store that the
Company was managing on behalf of a franchisee, as opposed to the three stores
the Company was managing on behalf of franchisees as of December 31, 2000.
Interest expense decreased by $355,000, or 82.2%, to $77,000 for the year
ended December 31, 2001, as compared to $432,000 for the comparable period in
2000. This decrease resulted from a decrease in long-term debt during the year
ended December 31, 2001, as compared to the comparable period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2002, cash flows provided by investing
activities were $1,058,000, principally due to the proceeds received on the
Company's franchise notes receivable, offset, in part, by limited capital
expenditures made by the Company during 2002.
Page -15-
For the year ended December 31, 2002, cash flows provided by financing
activities were $323,000, principally due to an aggregate of $2,141,000 of
proceeds from a secured note from an independent financial institution,
borrowings under the Company's credit facility with Horizons Investors Corp.
("Horizons"), a related party, and a loan from one of the Company's directors.
These proceeds were offset by payments made against the secured note, the credit
facility, the director loan, and short-term loans made at the end of 2001from
Horizons and Broadway Partners LLC ("Broadway"), also a related party.
As of December 31, 2002 (exclusive of net liabilities of discontinued
operations), the Company had negative working capital of $4,424,000 and cash on
hand of $664,000. During 2002, the Company used $1,817,000 of cash in its
operating activities. The Company incurred a net loss from continuing operations
of $4,721,000 for the year ended December 31, 2002. The primary components of
this loss were related to the provision for doubtful accounts of approximately
$1,829,000, along with a provision for store closings of $920,000. Additionally,
a majority of the cash used in operating activities was a result of $775,000 of
costs paid out related to the Company's store closure plan (Note 8), a net
decrease of $430,000 in accounts payable and accrued liabilities that existed as
of December 31, 2002, and $227,000 related to the prepayment of certain other
business expenses, offset, in part, by a net decrease of $328,000 in franchise
and other receivables, and a net decrease in inventories (due to the closure of
non-profitable Company-owned stores and improved inventory management) of
$290,000. Management anticipates that it will continue to make significant
payments against liabilities associated with the closure of non-profitable
Company-owned stores that are already reflected in the Consolidated Balance
Sheet as of December 31, 2002.
The Company plans to continue to improve its cash flows during 2003 by
improving store profitability through increased monitoring of store-by-store
operations, closing non-profitable Company-owned stores, continuing to implement
reductions of administrative overhead expenses where necessary and feasible,
actively supporting development programs for franchisees, and adding new
franchised stores to the system. Management believes that with the successful
execution of the aforementioned plans to improve cash flows, its existing cash,
the collection of outstanding receivables, and the successful completion of its
shareholder rights offering (Note 14), there will be sufficient liquidity
available for the Company to continue in operation through the first quarter of
2004. However, there can be no assurance that the Company will be able to
successfully execute the aforementioned plans, or that it will be successful in
completing its rights offering.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
High-quality financial statements require rigorous application of
high-quality accounting policies. Management believes that its policies related
to revenue recognition, legal contingencies, allowances on franchise, notes and
other receivables, and accruals for store closings and costs of disposal of
discontinued operations are critical to an understanding of the Company's
consolidated financial statements because their application places the most
significant demands on management's judgment, with financial reporting results
relying on estimation about the effect of matters that are inherently uncertain.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Debt Extinguishments and Accounting for Leases
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." For most companies, SFAS No. 145 will require gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations, rather than as an extraordinary item as previously
required. Extraordinary treatment will be required for certain extinguishments
as provided in Accounting Principles Board ("APB") Opinion No. 30. SFAS No. 145
also amends SFAS No. 13 to require that certain modifications to capital leases
be treated as a sale-leaseback, and to modify the accounting for sub-leases when
the original lessee remains a secondary obligor. The Company is required to
adopt the provisions of SFAS No. 145 in the first quarter of 2003.
Page -16-
Costs to Exit an Activity
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The requirements of SFAS No. 146
apply prospectively to activities that are initiated after December 31, 2002
and, as a result, the Company cannot reasonably estimate the impact of adopting
these new rules until and unless it undertakes relevant activities in future
periods.
Guarantee Disclosures
In November 2002, the FASB issued Interpretation ("FIN") No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which clarifies the required
disclosures to be made by a guarantor in their interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN No. 45 also requires a guarantor to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken. The
Company is required to adopt the disclosure requirements of FIN No. 45 for
financial statements ending December 31, 2002. The Company is required to adopt
and accordingly has adopted prospectively the initial recognition and
measurement provisions of FIN No. 45 for guarantees issued or modified after
December 31, 2002 and, as a result, the Company cannot reasonably estimate the
impact of adopting these new rules until and unless it undertakes relevant
activities in future periods.
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123." This
Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The adoption of SFAS No. 148 is
not expected to have a material impact on the Company's financial position or
results of operations.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, which clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, relating to consolidation of
certain entities. First, FIN No. 46 will require identification of the Company's
participation in variable interests entities ("VIEs"), which are defined as
entities with a level of invested equity that is not sufficient to fund future
activities to permit them to operate on a stand alone basis, or whose equity
holders lack certain characteristics of a controlling financial interest. For
entities identified as VIEs, FIN No. 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any, bears a
majority of the exposure to its expected losses, or stands to gain from a
majority of its expected returns. FIN No. 46 also sets forth certain disclosures
regarding interests in VIEs that are deemed significant, even if consolidation
is not required. As the Company does not participate in VIEs, it does not
anticipate that the provisions of FIN No. 46 will have a material impact on its
financial position or results of operations.
Page -17-
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
--------------------------------------------------------------------
The Company presently has outstanding certain equity instruments with
beneficial conversion terms. Accordingly, the Company, in the future, could
incur non-cash charges to equity (as a result of the exercise of such beneficial
conversion terms), which would have a negative impact on future per share
calculations.
The Company is exposed to market risks from potential changes in interest
rates as they relate to the Company's investments in highly liquid marketable
securities and borrowings under its credit facility and term loan. The Company
believes that the level of risk related to its investments and any such
borrowings, is not material to the Company's financial condition or results of
operations. The Company does not expect to use interest rate swaps or other
instruments to hedge its borrowings under its credit facility or term loan.
Page -18-
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
TABLE OF CONTENTS
PAGE
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS 20-21
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2002 and 2001 22
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 23
Consolidated Statements of Shareholders' Equity (Deficit) for the
Years Ended December 31, 2002, 2001 and 2000 24
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 25
Notes to Consolidated Financial Statements 26
Information required by schedules called for under Regulation S-X is either
not applicable or is included in the consolidated financial statements or notes
thereto.
Page -19-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Emerging Vision, Inc.:
We have audited the accompanying consolidated balance sheet of Emerging
Vision, Inc. (a New York corporation) and subsidiaries (the "Company") as of
December 31, 2002, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of the Company as of, and for
the two years ended, December 31, 2001 were audited by other auditors who have
ceased operations and whose report, dated April 8, 2002, expressed an
unqualified opinion on those financial statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 2002 financial statements referred to above present
fairly, in all material respects, the financial position of Emerging Vision,
Inc. and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 3 to the financial statements, the Company changed its
method of accounting for goodwill in 2002, as required by the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."
/S/ Miller Ellin & Company LLP
New York, New York
March 28, 2003
Page -20-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Emerging Vision, Inc.:
We have audited the accompanying consolidated balance sheets of Emerging
Vision, Inc. (a New York corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for the three years ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Emerging Vision, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the three years ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Melville, New York
April 8, 2002
THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN REPORT AND HAS
NOT BEEN REISSUED BY ARTHUR ANDERSEN. PURSUANT TO SEC RELEASE NO. 33-8070 AND
RULE 437A UNDER THE SECURITIES ACT OF 1933, AS AMENDED, EMERGING VISION, INC.
HAS NOT RECEIVED WRITTEN CONSENT AFTER REASONABLE EFFORT TO USE THIS REPORT.
BECAUSE ARTHUR ANDERSEN LLP HAS NOT CONSENTED TO THE INCLUSION OF THEIR REPORT
IN THIS REPORT, YOU WILL NOT BE ABLE TO RECOVER AGAINST ARTHUR ANDERSEN LLP
UNDER SECTION 11 OF THE SECURITIES ACT FOR ANY UNTRUE STATEMENTS OF A MATERIAL
FACT CONTAINED IN THE FINANCIAL STATEMENTS AUDITED BY ARTHUR ANDERSEN LLP OR ANY
OMISSIONS TO STATE A MATERIAL FACT REQUIRED TO BE STATED THEREIN.
Page -21-
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
December 31,
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 664 $ 1,053
Franchise receivables, net of allowance of $1,063 and $3,095, respectively 1,133 1,837
Other receivables, net of allowance of $101 and $171, respectively 447 739
Current portion of franchise notes receivable, net of allowance
of $442 and $0, respectively 612 2,993
Inventories 456 783
Prepaid expenses and other current assets 321 94
----------- -----------
Total current assets 3,633 7,499
----------- -----------
Property and equipment, net 693 1,075
Franchise notes and other receivables, net of allowance of $1,486
and $3,326, respectively 781 862
Goodwill 1,266 1,266
Other assets 277 355
----------- -----------
Total assets $ 6,650 $ 11,057
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt, net (Note 11) $ 626 $ 186
Accounts payable and accrued liabilities (Note 9) 5,945 6,375
Accrual for store closings (Note 8) 1,109 964
Related party borrowings (Notes 11 and 13) 377 750
Net liabilities of discontinued operations 208 235
----------- -----------
Total current liabilities 8,265 8,510
----------- -----------
Long-term debt, net (Note 11) 260 363
----------- -----------
Related party borrowings (Notes 11 and 13) 231 -
----------- -----------
Franchise deposits and other liabilities 1,709 1,567
----------- -----------
Commitments and contingencies (Note 12)
Shareholders' equity (deficit):
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized:
Senior Convertible Preferred Stock, $100,000 liquidation preference
per share; 1 and 3 shares issued and outstanding, respectively 74 287
Common stock, $0.01 par value per share; 150,000,000 shares authorized;
29,922,957 and 27,187,309 shares issued, respectively, and 29,740,620
and 27,004,972 shares outstanding, respectively 299 272
Treasury stock, at cost, 182,337 shares (204) (204)
Additional paid-in capital 120,345 119,926
Accumulated deficit (124,329) (119,664)
----------- -----------
Total shareholders' equity (deficit) (3,815) 617
----------- -----------
Total liabilities and shareholders' equity (deficit) $ 6,650 $ 11,057
=========== ===========
The accompanying notes are an integral part of these consolidated balance sheets.
Page -22-
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
For the Year Ended December 31,
-----------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Revenues:
Net sales $ 9,906 $ 11,648 $ 12,115
Franchise royalties 6,816 7,860 9,077
Net gains from the conveyance of Company-store assets to franchisees, and
other franchise related fees 71 140 298
Interest on franchise notes receivable 312 947 1,210
Other income 320 58 358
----------- ----------- -----------
17,425 20,653 23,058
----------- ----------- -----------
Costs and expenses:
Cost of sales 2,282 3,077 3,870
Selling, general and administrative expenses 18,564 20,361 31,260
Loss from franchised stores operated under management agreements - 167 627
Provision for store closings (Note 8) 920 964 -
Charges related to long-lived assets 173 930 1,131
Non-cash charges for issuance of common stock, warrants and induced
conversions of warrants - 165 366
Interest expense 207 77 432
----------- ----------- -----------
22,146 25,741 37,686
----------- ----------- -----------
Loss from continuing operations before provision for income taxes (4,721) (5,088) (14,628)
Provision for income taxes - - -
----------- ----------- -----------
Loss from continuing operations (4,721) (5,088) (14,628)
----------- ----------- -----------
Discontinued operations (Note 2):
Income (loss) from discontinued operations 74 1,312 (15,533)
Loss on disposal of discontinued operations - - (8,831)
----------- ----------- -----------
Income (loss) from discontinued operations 74 1,312 (24,364)
----------- ----------- -----------
Net loss $ (4,647) $ (3,776) $ (38,992)
=========== =========== ===========
Per share information - basic and diluted (Note 4):
Loss from continuing operations $ (0.17) $ (0.19) $ (2.04)
Income (loss) from discontinued operations 0.01 0.05 (0.66)
Loss on disposal of discontinued operations - - (0.37)
----------- ----------- -----------
Net loss per share $ (0.16) $ (0.14) $ (3.07)
=========== =========== ===========
Weighted-average number of common shares outstanding - basic and diluted 28,641 26,409 23,627
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
Page -23-
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In Thousands, Except Share Data)
Series B Convertible Senior Convertible
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ---------- --------
BALANCE - DECEMBER 31, 1999................................ - $ - 21 $2,417 16,676,630 $ 167
Issuance of common shares upon induced conversion
of Senior Convertible Preferred Stock................. - - (18) (2,130) 2,468,334 25
Exercise of stock options and warrants..................... - - - - 2,048,460 20
Issuance of common shares for consulting services.......... - - - - 1,010,000 10
Issuance of Series B Convertible Preferred Stock........... 1,677,570 - - - - -
Issuance of warrants in connection with
Series B Convertible Preferred Stock.................. - - - - - -
Accretion of dividends on Series B Convertible
Preferred Stock....................................... - 11,743 - - - -
Issuance of common shares upon conversion of Series B
Convertible Preferred Stock........................... (1,677,570) (11,743) - - 3,355,140 34
Issuance of common shares to franchisees................... - - - - 667 -
Issuance of warrants and options for consulting services... - - - - - -
Equity contribution related to extinguishment of
debt to related party................................. - - - - - -
Acquisition of treasury shares............................. - - - - - -
Net loss................................................... - - - - - -
----------- ------- ------ ------ ---------- --------
BALANCE - DECEMBER 31, 2000................................ - - 3 287 25,559,231 256
Issuance of common shares for consulting services (Note 14) - - - - 1,628,078 16
Acquisition of treasury shares (Note 14)................... - - - - - -
Net loss................................................... - - - - - -
----------- ------- ------ ------ ---------- --------
BALANCE - DECEMBER 31, 2001................................ - - 3 287 27,187,309 272
Issuance of warrrants in connection with financing
arrangements (Note 11).................................. - - - - - -
Exercise of stock warrants (Note 15)....................... - - - - 2,500,000 25
Issuance of common shares upon conversion of Senior
Covertible Preferred Stock (Note 14).................... - - (2) (213) 235,648 2
Net loss................................................... - - - - - -
----------- ------- ------ ------ ---------- --------
BALANCE - DECEMBER 31, 2002................................ - $ - 1 $ 74 29,922,957 $ 299
=========== ======= ====== ====== ========== ========
The accompanying notes are an integral part of these consolidated statements.
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In Thousands, Except Share Data)
Treasury Stock, Additional Total
at cost Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity (Deficit)
------ ----- -------- --------- --------
BALANCE - DECEMBER 31, 1999................................. - $ - $ 55,023 $ (43,446) $ 14,161
Issuance of common shares upon induced conversion
of Senior Convertible Preferred Stock.................. - - 23,812 (21,707) -
Exercise of stock options and warrants...................... - - 7,672 - 7,692
Issuance of common shares for consulting services........... - - 9,798 - 9,808
Issuance of Series B Convertible Preferred Stock............ - - 6,239 - 6,239
Issuance of warrants in connection
with Series B Convertible Preferred Stock............. - - 4,379 - 4,379
Accretion of dividends on Series B Convertible
Preferred Stock........................................ - - - (11,743) -
Issuance of common shares upon conversion of Series B
Convertible Preferred Stock............................ - - 11,709 - -
Issuance of common shares to franchisees.................... - - - - -
Issuance of warrants and options for consulting services.... - - 94 - 94
Equity contribution related to extinguishment of
debt to related party.................................. - - 727 - 727
Acquisition of treasury shares.............................. 177,001 (203) - - (203)
Net loss.................................................... - - - (38,992) (38,992)
------- ----- -------- --------- --------
BALANCE - DECEMBER 31, 2000 177,001 (203) 119,453 (115,888) 3,905
Issuance of common shares for consulting services (Note 14) - - 473 - 489
Acquisition of treasury shares (Note 14)................... 5,336 (1) - - (1)
Net loss................................................... - - - (3,776) (3,776)
------- ----- -------- --------- --------
BALANCE - DECEMBER 31, 2001................................ 182,337 (204) 119,926 (119,664) 617
Issuance of warrrants in connection with financing
arrangements (Note 11).................................. - - 190 - 190
Exercise of stock warrants (Note 15)....................... - - - - 25
Issuance of common shares upon conversion of Senior
Covertible Preferred Stock (Note 14).................... - - 229 (18) -
Net loss................................................... - - - (4,674) (4,674)
------- ----- -------- --------- --------
BALANCE - DECEMBER 31, 2002................................ 182,337 $(204) $120,345 $(124,329) $(3,815)
======= ===== ======== ========= ========
The accompanying notes are an integral part of these consolidated statements.
Page -24-
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Year Ended December 31,
----------------------------------------------
2002 2001 2000
-------------- ---------------- --------------
Cash flows from operating activities:
Net loss from continuing operations $ (4,721) $ (5,088) $ (14,628)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization 489 1,351 1,440
Provision for doubtful accounts 1,829 138 6,967
Provision for store closings 920 964 -
Provision for inventories - 100 -
Net gains from the conveyance of Company-owned store assets to
franchisees - - (298)
Amortization of excess of fair value of assets acquired over cost - (317) (348)
Non-cash compensation charges related to options and warrants 87 165 94
Charges related to long-lived assets 173 930 1,131
Changes in operating assets and liabilities:
Franchise and other receivables 328 1,007 (35)
Inventories 290 150 880
Prepaid expenses and other current assets (227) 381 95
Other assets 78 15 330
Accounts payable and accrued liabilities (430) (5,365) 2,788
Franchise deposits and other liabilities 142 (134) (32)
Accrual for store closings (775) - (299)
----------- ----------- -----------
Net cash used in operating activities (1,817) (5,703) (1,915)
----------- ----------- -----------
Cash flows from investing activities:
Franchise notes receivable issued (71) - (582)
Proceeds from franchise and other notes receivable 1,409 1,961 2,030
Purchases of property and equipment (280) (345) (1,579)
----------- ----------- -----------
Net cash provided by (used in) investing activities 1,058 1,616 (131)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants 25 - 7,692
Proceeds from borrowings 2,141 750 -
Payments on borrowings (1,843) (205) (6,594)
Net proceeds from the issuance of Series B Convertible Preferred Stock - - 10,618
Acquisition of treasury shares - (1) (203)
----------- ----------- -----------
Net cash provided by financing activities 323 544 11,513
----------- ----------- -----------
Net cash (used in) provided by continuing operations (436) (3,543) 9,467
----------- ----------- -----------
Net cash provided by (used in) discontinued operations 47 (619) (4,360)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (389) (4,162) 5,107
Cash and cash equivalents - beginning of year 1,053 5,215 108
----------- ----------- -----------
Cash and cash equivalents - end of year $ 664 $ 1,053 $ 5,215
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 118 $ 49 $ 324
=========== =========== ===========
Taxes $ 75 $ 69 $ 28
=========== =========== ===========
Non-cash investing and financing activities:
Franchise store assets reacquired $ - $ 501 $ 416
Issuance of common shares for consulting services - 165 -
Issuance of common shares to settle vendor payable related to
discontinued operations - 324 -
Extinguishment of related party debt - - 727
The accompanying notes are an integral part of these consolidated statements.
Page -25-
EMERGING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS:
Business
--------
Emerging Vision, Inc. and subsidiaries (the "Company"), is one of the
largest chains of retail optical stores and one of the largest franchise optical
chains in the United States, based upon management's beliefs, domestic sales and
the number of locations of Company-owned and franchised stores (collectively
referred to herein as "Sterling Stores"). The Company was incorporated under the
laws of the State of New York in January 1992 and, in July 1992, purchased
substantially all of the assets of Sterling Optical Corp., a New York
corporation then a debtor-in-possession under Chapter 11 of the U.S. Bankruptcy
Code.
On March 28, 2001, the Board of Directors decided that the Company should
focus its efforts and resources on growing its retail optical business and, as a
result, approved a plan to discontinue all other operations then being conducted
by the Company (Note 2). In connection with this decision, during 2001, the
Company completed its plan of disposal of substantially all of the net assets of
Insight Laser Centers, Inc. ("Insight Laser") - which operated three laser
vision correction centers in the New York metropolitan area, Insight Laser
Centers N.Y.I, Inc. (the "Ambulatory Center") - the owner of the assets of an
ambulatory surgery center located in Garden City, New York, and its Internet
Division - which was to provide a web-based portal being designed to take
advantage of business-to-business opportunities in the optical industry.
As of December 31, 2002, there were 182 Sterling Stores in operation,
consisting of 23 Company-owned stores (including 8 stores being managed by
franchisees), and 159 franchised stores. As discussed in Note 8, the Company
anticipates closing 11 of its non-profitable Company-owned stores during 2003.
Basis of Presentation
---------------------
The Consolidated Financial Statements reflect the operations of the
Company's retail optical store division as continuing operations. The results of
operations and cash flows of Insight Laser, the Ambulatory Center and the
Internet Division are reflected as discontinued operations in accordance with
Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The
remaining net liabilities of those segments of the Company's business have been
separately stated on the accompanying Consolidated Balance Sheets as net assets
or liabilities of discontinued operations, and are classified depending on their
expected realization and/or settlement date.
Management's Liquidity Plans
----------------------------
As of December 31, 2002 (exclusive of net liabilities of discontinued
operations), the Company had negative working capital of $4,424,000 and cash on
hand of $664,000. During 2002, the Company used $1,817,000 of cash in its
operating activities. The Company incurred a net loss from continuing operations
of $4,721,000 for the year ended December 31, 2002. The primary components of
this loss were related to the provision for doubtful accounts of approximately
$1,829,000, along with a provision for store closings of $920,000. Additionally,
a majority of the cash used in operating activities was a result of $775,000 of
costs paid out related to the Company's store closure plan (Note 8), a net
decrease of $430,000 in accounts payable and accrued liabilities that existed as
of December 31, 2002, and $227,000 related to the prepayment of certain other
business expenses, offset, in part, by a net decrease of $328,000 in franchise
and other receivables, and a net decrease in inventories (due to the closure of
non-profitable Company-owned stores and improved inventory management) of
$290,000. Management anticipates that it will continue to make significant
payments against liabilities associated with the closure of non-profitable
Company-owned stores that are already reflected in the Consolidated Balance
Sheet as of December 31, 2002.
The Company plans to continue to improve its cash flows during 2003 by
improving store profitability through increased monitoring of store-by-store
operations, closing non-profitable Company-owned stores, continuing to implement
reductions of administrative overhead expenses where necessary and feasible,
actively supporting development programs for franchisees, and adding new
franchised stores to the system. Management believes that with the successful
execution of the aforementioned plans to improve cash flows, its existing cash,
the collection of outstanding receivables, and the successful completion of its
shareholder rights offering (Note 14), there will be sufficient liquidity
available for the Company to continue in operation through the first quarter of
2004. However, there can be no assurance that the Company will be able to
successfully execute the aforementioned plans, or that it will be successful in
completing its rights offering.
Page -26-
NOTE 2 - DISCONTINUED OPERATIONS:
As discussed in Note 1, in March 2001, the Company's Board of Directors
decided to discontinue the operations of the Internet, Insight Laser and
Ambulatory Center divisions. The Company successfully completed its plan of
disposal of the assets of these segments in 2001. Accordingly, the remaining
results of operations and cash flows have been reflected as discontinued
operations in the accompanying consolidated financial statements. As of December
31, 2002, there were approximately $159,000 of expenses associated with the
Company's disposal of these divisions accrued as part of accounts payable and
accrued liabilities on the accompanying Consolidated Balance Sheet. The majority
of this amount (of which $195,000 was provided for during 2002) relates to
certain potential ongoing liabilities that the Company agreed to guarantee in
connection with the Company's sale of the Ambulatory Center (Note 12).
In August 2002, the Company received approximately $342,000 in connection
with the Pillar Point Partners Antitrust and Patent Litigation, a class action
lawsuit to which Insight Laser was a plaintiff. This amount was reflected as
income from discontinued operations on the accompanying Consolidated Statement
of Operations for the year ended December 31, 2002, and offset the
aforementioned costs associated with the Ambulatory Center guarantee.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities as of the dates of such
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Significant estimates made by management include, but are not limited to,
allowances on franchise, notes and other receivables, and accruals for store
closings and costs of disposal of discontinued operations.
Principles of Consolidation
---------------------------
The Consolidated Financial Statements include the accounts of Emerging
Vision, Inc. and its operating subsidiaries, all of which are wholly-owned. All
intercompany balances and transactions have been eliminated in consolidation.
Company-Managed Stores
----------------------
The Company accounts for the results of operations of certain franchised
Sterling Stores operated by the Company under management agreements in
accordance with Emerging Issues Task Force Issue 97-2 ("EITF 97-2"),
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." In accordance with EITF 97-2, the results of
operations of Company-managed stores are shown on a net basis, and are
classified as a loss from franchised stores operated under management agreements
in the accompanying Consolidated Statements of Operations.
For the years ended December 31, 2001 and 2000, the Company managed 1 and 3
Sterling Stores, respectively, for franchisees, under management agreements
entered into with each such franchisee. These management agreements generally
provided for the operation of the Sterling Store in question, by the Company,
with all operating decisions primarily being made by the Company. The Company
owned the inventory at these locations and was responsible for the collection of
all revenues and the payment of all associated expenses. For the years ended
December 31, 2001 and 2000, these stores generated revenues of $216,000 and
$1,382,000, respectively, and net losses of $167,000 and $627,000, respectively.
The Company did not manage any stores on behalf of franchisees during 2002, and
has no intention of doing so in the future.
Revenue Recognition
-------------------
The Company generally charges franchisees a nonrefundable initial franchise
fee. Initial franchise fees are recognized at the time all material services
required to be provided by the Company have been substantially performed.
Continuing franchise royalty fees are based upon a percentage of the gross
revenues generated by each franchised location and are recorded as earned,
subject to meeting all of the requirements of SAB 101 described below.
Page -27-
The Company derives its revenues from the following four principal sources:
Net sales - Represents sales from eye care products and related services;
Franchise royalties - Represents continuing franchise fees based upon a
percentage of the gross revenues generated by each franchised location;
Net gains from the conveyance of Company-store assets to franchisees, and
other franchise related fees - Represents the net gains from the sale of
Company-owned store assets to franchisees; and certain fees collected by the
Company under the terms of franchise agreements (including, but not limited to,
initial franchise fees, transfer fees and renewal fees).
Interest on franchise notes - Represents interest charged to franchisees
pursuant to promissory notes issued in connection with a franchisee's
acquisition of the assets of a Sterling Store or a qualified refinancing of a
franchisee's obligations to the Company.
The Company recognizes revenues in accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101").
Accordingly, revenues are recorded when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the Company's
price to the buyer is fixed or determinable, and collectibility is reasonably
assured. To the extent that collectibility of royalties and/or interest on
franchise notes is not reasonably assured, the Company recognizes such revenue
when the cash is received.
The Company also follows the provisions of Emerging Issues Task Force
("EITF") Issue 01-09, "Accounting for Consideration Given by a Vendor to a
Customer (Including Reseller of the Vendor's Products)" and, accordingly,
accounts for discounts, coupons and promotions (that are offered to its
customers) as a direct reduction of sales.
Cash and Cash Equivalents
-------------------------
Cash represents cash on hand at Company-owned stores and cash on deposit
with financial institutions. All highly liquid investments with an original
maturity (from date of purchase) of three months or less are considered to be
cash equivalents. The Company's cash equivalents are invested in various
investment-grade, money market accounts.
Fair Value of Financial Instruments
-----------------------------------
As of December 31, 2002, the carrying values of the Company's financial
instruments, such as cash and cash equivalents, accounts and notes receivable
and long-term debt, approximated their fair values, based on their short-term
maturities and the nature of these instruments.
Inventories
-----------
Inventories are stated at the lower of cost or market value, and consist
primarily of contact lenses, ophthalmic lenses, eyeglass frames and sunglasses.
Property and Equipment
----------------------
Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation is recorded on a straight-line basis over the
estimated useful lives of the respective classes of assets.
Goodwill
--------
Through December 31, 2001, goodwill was being amortized, on a straight-line
basis, over its estimated useful life of 20 years, and accumulated amortization
on goodwill was approximately $1,275,000 as of December 31, 2001.
In 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." This Statement provided that goodwill and intangible assets
with indefinite lives should no longer be amortized, but should be reviewed, at
least annually, for impairment. In accordance with the adoption of SFAS No. 142,
beginning January 1, 2002, the Company ceased amortizing its existing net
goodwill of $1,266,000, resulting in the exclusion of approximately $268,000 of
amortization expense for the year ended December 31, 2002. Management performed
a review of its existing goodwill and determined that it is not impaired as of
December 31, 2002.
Page -28-
Impairment of Long-Lived Assets
-------------------------------
The Company follows the provisions of SFAS No. 121, "Accounting for the
Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of".
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable, but amends the prior accounting and reporting standards for
segments of a business to be disposed of. The Company periodically evaluates its
long-lived assets (on a store-by-store basis) based on, among other factors, the
estimated, undiscounted future cash flows expected to be generated from such
assets in order to determine if an impairment exists. For the years ended
December 31, 2002 and 2001, the Company recorded impairment charges of $0 and
$574,000, respectively, for stores it will continue to operate, and wrote off
$173,000 and $356,000, respectively, of long-lived assets related to stores that
management has made the decision to close (Note 8). For the year ended December
31, 2000, the Company recorded impairment charges of $1,131,000 related to
certain corporate long-lived assets that it no longer had use for, along with
the capitalized web development costs associated with the development of the
website for its 1-800 Anylens business (Note 13). All of the aforementioned
amounts are reflected in the Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000, respectively, and a new basis, if any,
for the impaired assets was established.
Advertising Costs
-----------------
The Company expenses advertising costs as incurred. Advertising costs for
Company-owned stores aggregated approximately $364,000, $536,000 and $500,000
for the years ended December 31, 2002, 2001 and 2000, respectively.
Comprehensive Income
--------------------
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which establishes rules for the reporting of
comprehensive income and its components. For the years ended December 31, 2002,
2001 and 2000, the Company's operations did not give rise to items includible in
comprehensive loss that were not already included in net loss. Therefore, the
Company's comprehensive loss is the same as its net loss for all periods
presented.
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method specified by
SFAS No. 109, the deferred income tax amounts included in the Consolidated
Balance Sheets are determined based on the differences between the financial
statement and tax basis of assets and liabilities, as measured by the enacted
tax rates, that will be in effect when these differences reverse. Differences
between assets and liabilities for financial statement and tax return purposes
are principally related to inventories and the depreciable lives of assets.
Stock-Based Compensation
------------------------
The Company follows the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation (an Interpretation of APB Opinion No. 25)" in connection with
stock-based compensation granted to employees and directors of the Company. The
Company provides the required pro forma disclosures, as if the fair value method
of SFAS No. 123, "Accounting for Stock Based Compensation," was adopted (Note
15). Stock-based compensation granted to non-employees is accounted for using
the provisions of SFAS No. 123.
Concentration of Credit Risk
----------------------------
The Company operates retail optical stores in North America, predominantly
in the United States, and its receivables are primarily from franchisees that
also operate retail optical stores in the United States.
Segment Information
-------------------
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes annual and interim reporting standards for an
enterprise's operating segments, and related disclosures about its products,
services, geographic areas and major customers. For the years ended December 31,
2002, 2001 and 2000, the Company's continuing operations were classified into
one principal industry segment - retail optical (Note 1). All other segments
have been reflected as discontinued operations. Accordingly, the disclosures
required by SFAS No. 131 have not been provided.
Page -29-
Reclassifications
-----------------
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the current year presentation.
New Accounting Pronouncements
-----------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." For most companies, SFAS No. 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations, rather than as an extraordinary item as previously required.
Extraordinary treatment will be required for certain extinguishments as provided
in APB Opinion No. 30. SFAS No. 145 also amends SFAS No. 13 to require that
certain modifications to capital leases be treated as a sale-leaseback, and to
modify the accounting for sub-leases when the original lessee remains a
secondary obligor. The Company is required to adopt the provisions of SFAS No.
145 in the first quarter of 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The requirements of SFAS No. 146
apply prospectively to activities that are initiated after December 31, 2002
and, as a result, the Company cannot reasonably estimate the impact of adopting
these new rules until and unless it undertakes relevant activities in future
periods.
In November 2002, the FASB issued Interpretation ("FIN") No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which clarifies the required
disclosures to be made by a guarantor in their interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN No. 45 also requires a guarantor to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken. The
Company is required to adopt the disclosure requirements of FIN No. 45 for
financial statements ending December 31, 2002. The Company is required to adopt
and accordingly has adopted prospectively the initial recognition and
measurement provisions of FIN No. 45 for guarantees issued or modified after
December 31, 2002 and, as a result, the Company cannot reasonably estimate the
impact of adopting these new rules until and unless it undertakes relevant
activities in future periods.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123." This
Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The adoption of SFAS No. 148 is
not expected to have a material impact on the Company's financial position or
results of operations.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, which clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, relating to consolidation of
certain entities. First, FIN No. 46 will require identification of the Company's
participation in variable interests entities ("VIEs"), which are defined as
entities with a level of invested equity that is not sufficient to fund future
activities to permit them to operate on a stand alone basis, or whose equity
holders lack certain characteristics of a controlling financial interest. For
entities identified as VIEs, FIN No. 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any, bears a
majority of the exposure to its expected losses, or stands to gain from a
majority of its expected returns. FIN No. 46 also sets forth certain disclosures
regarding interests in VIEs that are deemed significant, even if consolidation
is not required. As the Company does not participate in VIEs, it does not
anticipate that the provisions of FIN No. 46 will have a material impact on its
financial position or results of operations.
NOTE 4 - PER SHARE INFORMATION:
In accordance with SFAS No. 128, "Earnings Per Share", basic net loss per
common share ("Basic EPS") is computed by dividing the net loss attributable to
common shareholders by the weighted-average number of common shares outstanding.
Diluted net loss per common share ("Diluted EPS") is computed by dividing the
net loss attributable to common shareholders by the weighted-average number of
common shares and dilutive common share equivalents and convertible securities
then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and
Diluted EPS on the face of the Company's Consolidated Statements of Operations.
There were 9,222,657, 10,350,322 and 9,267,966 stock options and warrants
Page -30-
excluded from the computation of Diluted EPS for the years ended December 31,
2002, 2001 and 2000, respectively, as their effect on the computation of Diluted
EPS would have been anti-dilutive. Additionally, for the years ended December
31, 2002, 2001 and 2000, respectively, there were 0.74, 2.51 and 2.51 shares of
our Senior Convertible Preferred Stock outstanding, convertible into 98,519,
334,167 and 334,167 shares of the Company's Common Stock. Similarly, these
preferred shares were not "assumed converted" as the effect on the computation
of Diluted EPS would also have been anti-dilutive.
The following table sets forth the computation of basic and diluted per
share information:
(In thousands)
-------------------------------------------------
2002 2001 2000
-------------------------------------------------
Numerator:
---------
Loss from continuing operations $ (4,721) $ (5,088) $ (14,628)
Induced conversion of Senior Convertible Preferred Stock (18) - (21,707)
Accretion of dividends on Series B Convertible Preferred Stock - - (11,743)
----------- ----------- -----------
Numerator for basic and diluted loss per share -
loss attributable to common shareholders (4,739) (5,088) (48,078)
----------- ----------- -----------
Basic and Diluted:
Loss attributable to common shareholders (4,739) (5,088) (48,078)
Income (loss) from discontinued operations 74 1,312 (15,533)
Loss on disposal of discontinued operations - - (8,831)
----------- ----------- -----------
Net loss attributable to common shareholders $ (4,665) $ (3,776) $ (72,442)
=========== =========== ===========
Denominator:
-----------
Denominator for basic and diluted per share information -
weighted-average shares outstanding 28,641 26,409 23,627
=========== =========== ===========
Basic and Diluted Per Share Information:
---------------------------------------
Loss attributable to common shareholders $ (0.17) $ (0.19) $ (2.04)
Income (loss) from discontinued operations 0.01 0.05 (0.66)
Loss on disposal of discontinued operations - - (0.37)
---------- ---------- ----------
Net loss attributable to common shareholders $ (0.16) $ (0.14) $ (3.07)
========== ========== ==========
NOTE 5 - FRANCHISE NOTES RECEIVABLE
Franchise notes held by the Company consist primarily of purchase money
notes related to Company-financed conveyances of Company-owned store assets to
franchisees, and certain franchise notes receivable obtained by the Company in
connection with acquisitions in prior years. Substantially all notes are secured
by the underlying assets of the related franchised store, as well as, in most
cases, the personal guarantee of the principal owners of the franchisee. As of
December 31, 2002, these notes provided for interest at various rates ranging
from 8% to 12%.
Scheduled maturities of notes receivable as of December 31, 2002, are as
follows (in thousands):
2003 $ 1,054
2004 599
2005 485
2006 400
2007 187
Thereafter 596
---------
3,321
Less: allowance for doubtful accounts (1,928)
---------
$ 1,393
=========
Page -31-
NOTE 6 - VALUATION AND QUALIFYING ACCOUNTS:
Franchise receivables (such as royalties and rents receivable), franchise
notes receivable, and other Company receivables, are shown on the Consolidated
Balance Sheets net of allowances for doubtful accounts. The following is a
breakdown, by major component, of the change in those allowances, along with the
accruals for store closings and discontinued operations:
(In thousands)
As of December 31,
---------------- ---------------- ---------------
2002 2001 2000
---------------- ---------------- ---------------
Franchise Receivables:
Balance, beginning of year $ 3,095 $ 3,521 $ 2,443
Charged to expense 484 138 2,994
Reductions, including write-offs (4,293) (564) (1,916)
Additions 1,777 - -
---------- ---------- ----------
Balance, end of year $ 1,063 $ 3,095 $ 3,521
========== ========== ==========
Franchise Notes Receivables:
Balance, beginning of year $ 3,326 $ 3,019 $ 400
Charged to expense 1,195 - 3,650
Reductions, including write-offs (2,788) - (1,031)
Additions 195 307 -
---------- ---------- ----------
Balance, end of year $ 1,928 $ 3,326 $ 3,019
========== ========== ==========
Other Company Receivables:
Balance, beginning of year $ 171 $ 323 $ -
Charged to expense 150 - 323
Reductions, including write-offs (249) (152) -
Additions 29 - -
---------- ---------- ----------
Balance, end of year $ 101 $ 171 $ 323
========== ========== ==========
Accrual for Store Closings:
Balance, beginning of year $ 964 $ - $ 299
Charged to expense 920 964 -
Reductions (775) - (299)
---------- ---------- ----------
Balance, end of year $ 1,109 $ 964 $ -
========== ========== ==========
Accrual for Costs of Disposal of Discontinued Operations:
Balance, beginning of year $ 141 $ 4,719 $ -
Charged to expense 268 425 11,919
Reductions (250) (5,003) (7,200)
---------- ---------- ----------
Balance, end of year $ 159 $ 141 $ 4,719
========== ========== ==========
Page -32-
NOTE 7 - PROPERTY AND EQUIPMENT, NET:
Property and equipment, net, consists of the following:
Estimated
(In thousands) Useful
As of December 31, Lives
------------------------------ ------------
2002 2001
------------------------------
Furniture and fixtures $ 327 $ 275 5 years
Machinery and equipment 1,358 1,580 3-5 years
Leasehold improvements 998 1,105 10 years*
---------- ----------
2,683 2,960
Less: accumulated depreciation (1,990) (1,885)
---------- ----------
Property and equipment, net $ 693 $ 1,075
========== ==========
* Based upon the lesser of the assets' useful lives or the term of the
lease of the related property.
The net book value of assets held under capital leases included in property
and equipment aggregated $68,000 and $139,000 (net of accumulated depreciation
of $29,000 and $129,000) as of December 31, 2002 and 2001, respectively.
Depreciation expense for the years ended December 31, 2002, 2001 and 2000, was
$463,000, $885,000 and $1,172,000, respectively.
NOTE 8 - PROVISION FOR STORE CLOSINGS:
The Company follows the provisions of EITF 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity," and
in accordance therewith, the Company provides for losses it anticipates
incurring with respect to those Company-owned stores that it has identified for
future closure, at the time that management makes a formal commitment to any
such plan of closure. The provision is recorded at the time the determination is
made to close a particular store and is based on the expected net proceeds, if
any, to be generated from the disposition of the store's assets, as compared to
the carrying value (after consideration of impairment, if any - see Note 3) of
such store's assets and the estimated costs (including lease termination costs
and other expenses) that are anticipated to be incurred in the closing of the
store in question. For the years ended December 31, 2002 and 2001, the Company
recorded a provision for 15 and 11 store closings, respectively, totaling
approximately $920,000 (comprised of $792,000 in lease termination costs and
$128,000 for other associated expenses) and $964,000 (comprised of $766,000 in
lease termination costs and $198,000 for other associated expenses),
respectively, and such provision is separately stated in the accompanying
Consolidated Statements of Operations for the years ended 2002 and 2001. As of
December 31, 2002, 11 stores remained to be closed and $1,109,000 remained
accrued as accrual for store closings on the accompanying Consolidated Balance
Sheet. The Company anticipates closing all of the remaining stores during 2003,
4 of which were already closed subsequent to December 31, 2002. No provision for
store closings was provided for during the year ended December 31, 2000.
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following (in
thousands):
As of December 31,
-------------------------------------------------------
2002 2001
-------------------------------------------------------
Accounts payable $ 2,889 $ 3,798
Accrued payroll and fringe benefits 540 621
Accrual for costs of disposal of discontinued operations
(Note 2) 159 141
Accrued professional fees 220 306
Accrued advertising 987 612
Other accrued expenses 1,150 897
-------- --------
$ 5,945 $ 6,375
======== ========
Page -33-
NOTE 10 - INCOME TAXES:
The Company's effective tax rate differs from the statutory Federal income
tax rate of 34%, primarily due to the impact of recording a valuation allowance
to offset the potential future tax benefit resulting from net operating loss
carry-forwards for all years presented.
As of December 31, 2002 and 2001, net deferred tax assets were
approximately $17,600,000 and $20,600,000, respectively, resulting primarily
from the future tax benefit of net operating loss carry-forwards. In accordance
with SFAS No. 109, the Company has provided a full valuation allowance against
its net deferred tax assets as of December 31, 2002 and 2001, due to the
uncertainty as to their future realizability. The valuation allowance against
the net deferred tax assets decreased by approximately $3,000,000 and $700,000
during the years ended December 31, 2002 and 2001, respectively, and increased
by approximately $10,200,000 during the year ended December 31, 2000.
As of December 31, 2002, the Company had net operating loss carry-forwards
totaling approximately $44,000,000 available to offset future taxable income for
federal income tax purposes. The net operating loss carry-forwards expire in
varying amounts through 2022 and may be limited in accordance with Section 382
of the Internal Revenue Code of 1986, as amended, based on certain changes in
ownership that have occurred.
NOTE 11 - LONG-TERM DEBT (INCLUDING RELATED PARTY BORROWINGS):
As of December 31, 2002, principal payments due on the Company's long-term
debt (which includes capital leases) and related party borrowings are as follows
(in thousands):
Capital Related Party Other
Leases Borrowings Long-Term Debt
Year (1) (2) (3) (4)
---- ---------- -------------- --------------
2003 $ 221 $ 377 $ 500
2004 154 93 83
2005 23 39 -
2006 8 43 -
2007 - 47 -
Thereafter - 9 -
---------- ---------- ----------
$ 406 $ 608 $ 583
========== ========== ==========
1) Total capital lease obligations as of December 31, 2002 and 2001 were
$406,000 and $549,000, respectively. Capital leases are recorded at the lower of
the present value of the minimum lease payments or the fair value of the
underlying assets, and are payable in monthly installments, together with
interest at various rates ranging from 6.47% to 14.60%. These leases mature at
various dates through April 2006.
2) On December 31, 2002, the Company refinanced certain past due amounts,
owed to CFO, in an effort to improve its current cash flow position. As a
result, the Company signed a 5-year, $200,000 promissory note, in favor of CFO,
bearing interest at a rate of 10% per annum. The first monthly payment on the
note was due on March 1, 2003.
3) On January 23, 2002, the Company entered into an agreement with Horizons
to borrow up to a maximum of $1,000,000. This credit facility bears interest at
the prime rate plus 1% (5.75% as of December 31, 2002), provided for an initial
advance of $300,000, requires minimum incremental advances of $150,000, matures
on January 22, 2004, requires ratable monthly principal and interest payments of
each borrowing, is amortizable through the maturity date of the facility, is
fully collateralized by a pledge of certain of the Company's qualifying
franchise notes, and requires the payment of a facility fee of 2% per annum,
payable monthly, on the unused portion of the credit facility.
On August 8, 2002, the Company obtained an additional advance under the
credit facility of $300,000, the proceeds of which were used to repay an
outstanding related party borrowing (Note 13). As of December 31, 2002, the
Company owed approximately $408,000 under the credit facility. The Company
anticipates that all amounts outstanding under the credit facility with Horizons
will be paid in full with the proceeds of the shareholder rights offering (Note
14).
Page -34-
4) On January 23, 2002, the Company entered into a secured term note for
$1,000,000 with an independent financial institution. This note was repayable in
24 equal monthly installments of $41,666, and bears interest, as defined at the
inception of the note (4.95% per annum, and subsequently amended on April 1,
2002 to 3.95%). The note is fully collateralized by a $1,000,000 certificate of
deposit posted by Horizons, a related party, at the same financial institution.
As of December 31, 2002, the Company owed approximately $583,000 on the secured
term note, which is reflected net of a debt discount. The Company anticipates
that all amounts outstanding under the secured term note will be paid in full
with the proceeds of the shareholder rights offering (Note 14).
Simultaneous with the aforementioned financing, the Company repaid its
outstanding related party borrowings totaling $750,000, plus interest (Note 13).
In consideration for providing access to the credit facility and guaranteeing
the term note, the Company granted Horizons an aggregate of 2,500,000 warrants,
the fair value of which was $234,000 (Note 15). The net proceeds received were
allocated based on the relative fair values of the debt and the warrants.
Accordingly, $810,000 was allocated to the debt, and $190,000 was allocated to
the warrants as a discount to the debt to be amortized as interest expense over
the term of the note (2 years). For the year ended December 31, 2002,
approximately $87,000 of such discount was amortized and recognized as interest
expense in the accompanying Consolidated Statement of Operations. Additionally,
the remaining amount owed under the secured term note, as of December 31, 2002,
is reflected on the accompanying Consolidated Balance Sheet net of the remaining
unamortized discount of $103,000.
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
Operating Lease Commitments
---------------------------
The Company leases locations for the majority of both its Company-owned and
franchised stores, as well as its executive and administrative offices. As of
December 31, 2002, minimum future rental payments for Company-owned stores and
the Company's executive and administrative offices, as well as for stores leased
by the Company and subleased to franchisees, in the aggregate, are as follows
(in thousands):
------------------- ----------------- ----------------------
Total Lease Sublease Net Company
Obligations Rentals Obligations
------------------- ----------------- ----------------------
2003 $ 7,458 $ 6,697 $ 761
2004 6,602 5,979 623
2005 5,632 5,075 557
2006 4,266 3,825 441
2007 3,153 2,953 200
Thereafter 5,920 5,452 468
----------- ----------- -----------
$ 33,031 $ 29,981 $ 3,050
=========== =========== ===========
The Company holds the master lease on substantially all franchised
locations and, as part of the franchise agreement, sublets the subject premises
to the franchisee. In addition to the fixed rent payable under such master
leases, most master leases require payment of a pro rata portion of common area
maintenance expenses and real estate taxes, as well as percentage rent based
upon the sales volume of the store in question. As required by SFAS No. 13
"Accounting for Leases," the Company recognizes its rent expense on a
straight-line basis over the life of the related lease. Rent expense was
approximately $1,740,000, $2,048,000, and $3,444,000, net of sublease rentals of
approximately $7,676,000, $8,443,000, and $8,997,000, for the years ended
December 31, 2002, 2001 and 2000, respectively.
Employment Agreement
--------------------
The Company has an employment agreement with one of its key employees,
which extends through February 2005. The employment agreement provides for
certain base compensation and other miscellaneous benefits. The employment
agreement also provides for an incentive bonus based upon the Company's
achievement of certain EBITDA targets, as defined. In connection with this
employment agreement, the Company granted an aggregate of 150,000 employee stock
options at an exercise price of $0.075 (which was equal to the fair market value
of the Company's Common Stock on the date of grant), which options vested
immediately. Subsequent to December 31, 2002, the employee exercised all of such
options. Additionally, the 50,000 options previously granted to the employee (on
July 16, 2001), in connection with his previous employment agreement, became
immediately vested. These options, which have an exercise price of $0.26 and are
still outstanding, expire 10 years from the date of grant. The aggregate future
Page -35-
annual base compensation relating to this employment agreement for the years
ending December 31, 2003, 2004 and 2005, is approximately $182,000, $182,000 and
$21,000, respectively.
Contingencies
-------------
In 1999, Apryl Robinson commenced an action in Kentucky against, among
others, the Company, seeking an unspecified amount of damages and alleging
numerous claims, including fraud and misrepresentation. The claims that are the
subject of this action were subsequently tried in an action in New York that
resulted in a judgment in favor of the Company, and against Ms. Robinson and Dr.
Larry Joel, a co-defendant in such action. Subsequently, Ms. Robinson and Dr.
Joel filed for bankruptcy in Kentucky, and the Company is proceeding with its
efforts to enforce its judgment against Ms. Robinson and Dr. Joel.
In 1999, Berenter Greenhouse and Webster, the advertising agency previously
utilized by the Company, commenced an action, against the Company, in the New
York State Supreme Court, New York County, for amounts alleged to be due for
advertising and related fees. The amounts claimed by the plaintiff are in excess
of $200,000. In response to this action, the Company filed counterclaims of
approximately $500,000, based upon estimated overpayments allegedly made by the
Company pursuant to the agreement previously entered into between the parties.
As of the date hereof, this action was still in the discovery stage.
In April 2000, the Company commenced an action in the Supreme Court of the
State of New Jersey against Preit-Rubin, Inc. and Cumberland Mall Associates,
the landlord of the former Sterling Optical Store located in Cumberland Mall,
Vineland, New Jersey, seeking damages of approximately $200,000 as a result of
the defendants alleged wrongful eviction of the Company from this location. In
response thereto, the defendants asserted counterclaims of approximately
$100,000 plus legal fees based upon the Company's alleged breach of the lease
pursuant to which it occupied such store. Thereafter, the defendant filed a
motion for summary judgment seeking a dismissal of the Company's claims, which
motion was decided by the Court, in a favor of the defendant. As of the date
hereof, it is anticipated that a trial of this action will take place in April
2003.
In July 2001, the Company commenced an Arbitration Proceeding in the
Ontario Superior Court of Justice, against Eye-Site, Inc. and Eye Site
(Ontario), Ltd., as the makers of two promissory notes (in the aggregate
original principal amount of $600,000) made by one or more of the makers in
favor of the Company, as well as against Mohammed Ali, as the guarantor of the
obligations of each maker under each note. The notes were issued, by the makers,
in connection with the makers' acquisition of a Master Franchise Agreement for
the Province of Ontario, Canada, as well as their purchase of the assets of, and
a Sterling Optical Center Franchise for, four of the Company's retail optical
stores then located in Ontario, Canada. In response, the defendants
counterclaimed for damages, in the amount of $1,500,000, based upon, among other
items, alleged misrepresentations made by representatives of the Company in
connection with these transactions. The Company believes that it has a
meritorious defense to each counterclaim. As of the date hereof, these
proceedings were in the discovery stage.
In February 2002, Kaye Scholer, LLP, the law firm previously retained by
the Company as its outside counsel, commenced an action in the New York State
Supreme Court seeking unpaid legal fees of approximately $122,000. As of the
date hereof, the Company has answered the Complaint in such action. The Company
believes that it has a meritorious defense to such claim.
In May 2002, a class action was commenced in the California Superior Court,
Los Angeles County, against the Company and VisionCare of California ("VCC"), a
wholly owned subsidiary of the Company, by Consumer Cause, Inc. seeking a
preliminary and permanent injunction enjoining the defendants from their
continued alleged violation of the California Business and Professions Code (the
"California Code"), and restitution based upon the defendants' alleged illegal
charging of dilation fees during the four year period immediately preceding the
date of the plaintiff's commencement of such action. In its complaint, the
plaintiff alleged that VCC's employment of licensed optometrists, as well as its
operation (under the name Sterling VisionCare) of optometric offices in
locations which are usually situated adjacent to the Company's retail optical
stores located in the State of California, violates certain provisions of the
California Code and was seeking to permanently enjoin VCC from continuing to
operate in such manner. EVI and VCC intend to vigorously defend this action and
believe that they have meritorious defenses to the plaintiff's allegations,
which defenses will include. On motion of the Company, which included a claim
that VCC is a specialized Health Care Maintenance Organization that has been
specifically licensed, under the California Knox Keene Health Care Service Plan
Act of 1975, to provide the identical services that the plaintiff was seeking to
enjoin, the court has dismissed this action, with prejudice, and without
liability to the Company.
In August 2002, Sterling Advertising, Inc. ("SAI"), a wholly owned
subsidiary of the Company, commenced an action in the New York State Supreme
Court, Nassau County, against Harvey Herman Associates, Inc. ("HHA"), an
advertising agency previously retained by SAI, seeking damages, in the estimated
amount of $150,000, as a result of HHA's alleged failure to provide certain of
the services otherwise required of it pursuant to the terms of a certain
Client-Agency Agreement, dated July 9, 2001, between SAI and HHA. Thereafter,
HHA, on August 6, 2002, commenced an action in the New York State Supreme Court,
New York County, against the Company, seeking damages in the approximate amount
of $90,000, based upon one or more additional agreements allegedly entered into
Page -36-
between HHA and the Company, which, in the opinion of SAI, required HHA to
perform certain services which were already included within the scope of the
services required to be performed, by HHA, under such Client-Agency Agreement.
As of the date hereof, the parties have agreed, in principal, to settle such
litigation without the payment of any additional compensation.
In October 2002, an action was commenced against the Company and its wholly
owned subsidiary, Sterling Vision of Eastland, Inc. (the "Tenant"), in the North
Carolina General Court of Justice, in which Charlotte Eastland Mall, LLC, as the
Landlord of the Tenant's former Sterling Optical Center located in Charlotte,
North Carolina, is seeking, among other things, damages against the Company, in
the approximate amount of $81,000, under its Limited Guaranty of the Tenant's
obligations under the Lease for such Center. The Company believes that it has a
meritorious defense to such action. As of the date hereof, these proceedings
were in the discovery stage.
In December 2002, Pyramid Champlain Company ("Pyramid") commenced an action
against the Company, in the Supreme Court of the State of New York, Onondaga
County, in which Pyramid, as the Landlord of the Company's former Sterling
Optical Center located in Plattsburg, New York, is seeking, among other things,
damages against the Company, in the approximate amount of $230,000, under the
Lease for such Center. The Company believes that it has a meritorious defense to
such action. As of the date hereof, there is pending a motion, by Pyramid, to
grant Pyramid partial summary judgment on certain of its claims raised in said
action.
On or about January 15, 2003, Wells Fargo Financial Leasing, Inc. commenced
an action against the Company, in the United States District Court, Eastern
District of New York, as the lessor of certain office equipment allegedly leased
to the Company, and is seeking therein, among other things, damages against the
Company, in the approximate amount of $100,000, in respect of claims arising
under such lease. The Company believes that it has a meritorious defense to such
action. As of the date hereof, the Company's time to answer the complaint has
not expired.
In addition to the foregoing, the Company is a defendant in certain
lawsuits alleging various claims incurred in the ordinary course of business,
certain of which claims are covered by various insurance policies, subject to
certain deductible amounts and maximum policy limits. In the opinion of
management, the resolution of these claims should not have a material adverse
effect, individually or in the aggregate, upon the Company's business or
financial condition. Other than as set forth above, management believes that
there are no other legal proceedings pending or threatened to which the Company
is, or may be, a party, or to which any of its properties are or may be subject,
which, in the opinion of management, will have a material adverse effect on the
Company.
In connection with the Company's sale of the Ambulatory Center in May 2001
(Note 2), the Company agreed to guarantee certain of the potential ongoing
liabilities of the Ambulatory Center. During the years ended December 31, 2002
and 2001, the Company recognized expense of approximately $195,000 and $120,000,
respectively, for such guaranteed liabilities, based on information provided by
the owner. Such expenses were included in income from discontinued operations on
the accompanying Consolidated Statements of Operations for the years ended
December 31, 2002 and 2001, respectively. As of December 31, 2002, there was
$159,000 included in accounts payable and accrued liabilities on the
accompanying Consolidated Balance Sheet, representing amounts still owed related
to 2002, along with estimated cash flow losses of the Ambulatory Center through
the first quarter of 2003. Although the term of the Company's guarantee (of such
liabilities) will not expire until April 2008, its exposure there under may, in
the future, be reduced, on a pro-rata basis, based upon the ability of the
current owner to attract additional investors who agree to guarantee all or a
portion thereof. However, there can be no assurance that such liabilities will
be so reduced and, as a result, the Company could in the future continue to
incur further costs associated with such guarantee should the Ambulatory Center
continue to generate cash flow losses.
As of December 31, 2002, the Company was a guarantor of certain leases of
Sterling Stores franchised and subleased to its franchisees. In the case all of
such franchisees defaulted on their subleases, the Company would be obligated
for aggregate lease obligations of approximately $7,465,000.
NOTE 13 - RELATED PARTY TRANSACTIONS:
During the first quarter of 2000, Broadway Partners LLC ("Broadway"), a
partnership owned by certain of the children of certain of the Company's
principal shareholders and directors, accepted from the Company its $550,000
offer to purchase a certain non-interest bearing debenture payable in full on
September 15, 2015 (previously issued by the Company in connection with its
acquisition of substantially all of the assets of Benson Optical Co., Inc. and
affiliates, and subsequently purchased by Broadway), having a then discounted
present value of approximately $1,277,000. The resulting gain of $727,000 was
reflected as a capital contribution, as it was shareholder related, in the
accompanying Consolidated Statements of Shareholders' Equity.
Page -37-
On November 30, 2000, the Company sold and transferred to Anylens
Acquisition, LLC, a Delaware limited liability company owned by the children of
certain of the principal shareholders and directors of the Company, all of the
assets (including certain federally registered trademarks) then comprising the
proposed mail order, contact lens business previously being developed by the
Company, together with all of the Company's equity interests in two of its
wholly owned subsidiaries, 1-800-Anylens, Inc. and 1-800 Any Lens of Boca Raton,
Inc., which were then the lessees of certain real property and equipment
previously intended to be utilized by the Company in connection with the
operation of the aforementioned business.
In June 2001, due to the significant losses being incurred by the Company
in connection with the operation thereof, the Company subleased its store
(together with certain of the assets located therein) in Nyack, New York to
General Vision Services LLC ("GVS"), a retail optical chain owned by certain of
the principal shareholders and directors of the Company, and members of their
respective immediate families. In connection with this transfer, the Company
agreed to provide a rent subsidy of $2,500 per month through June 30, 2003.
On December 3, 2001 and December 20, 2001, respectively, the Company's
Board of Directors authorized the Company to borrow $150,000 and $300,000 from
Horizon Investors Corp. ("Horizon"), a New York corporation principally owned by
a director and principal shareholder of the Company. The loan was payable on
demand, together with interest calculated at the prime rate plus 1%. The Company
repaid these loans (which aggregated $450,000 as of December 31, 2001), in full,
on January 23, 2002 (Note 11).
On December 6, 2001, the Company's Board of Directors authorized the
Company to borrow $300,000 from Broadway. The loan was payable on demand,
together with interest calculated at the prime rate plus 1%. The Company repaid
this loan ($300,000 as of December 31, 2001), in full, on January 23, 2002 (Note
11).
During 2002 and 2001, the Company purchased from City Lens, Inc. ("City
Lens"), an ophthalmic lens laboratory owned, directly or indirectly, by certain
of the principal shareholders and directors of the Company, together with
certain members of their immediate families, ophthalmic lenses and certain lens
refinishing services for its Company-owned stores. For the years ended December
31, 2002 and 2001, respectively, the total cost of such lenses and services
purchased from City Lens, was approximately $228,000 and $243,000. The Company
believes that the cost of such lenses and services were as favorable to the
Company as those which could have been obtained from an unrelated third party.
In April 2002, the Company sold substantially all of the assets of one of
its stores located in New York City, together with all of the capital stock of
its wholly-owned subsidiary, Sterling Vision of 125th Street, Inc., which is the
tenant under the master lease for such store, to GVS, for the sum of $55,000.
On July 23, 2002, the Board authorized the Company to borrow $300,000 from
one of its principal shareholders and directors. The loan was payable on August
10, 2002, together with interest in an amount equal to 1% of the principal
amount of such loan. The Company repaid this loan, in full, on August 8, 2002
(Note 11).
On December 31, 2002, the Company refinanced certain past due amounts, owed
to CFO, in an effort to improve its current cash flow position. As a result, the
Company signed a 5-year, $200,000 promissory note, in favor of CFO, bearing
interest at a rate of 10% per annum. The first monthly payment on the note was
due on March 1, 2003.
Until January 10, 2002, the Company subleased, from a limited liability
company owned by certain of the Company's principal shareholders, and shared
with CFO and others, an office building located in East Meadow, New York.
Occupancy costs were appropriately allocated based upon the applicable square
footage leased by the respective tenants of the building. For the years ended
December 31, 2001 and 2000, the Company paid approximately $440,000 and
$420,000, respectively, for rent and related charges for these offices. On
January 10, 2002, the Company relocated to an office building located in Garden
City, New York, and entered into a sublease with CFO for one of the two floors
then being subleased to CFO. Occupancy costs are being allocated between the
Company and CFO based upon the respective square footages being occupied. For
the year ended December 31, 2002, the Company paid approximately $158,000 for
rent and related charges under this new sublease. Management believes that such
sublease is at fair market value.
During the ordinary course of business, largely due to the fact that the
entities occupy office space in the same building, and in an effort to obtain
savings with respect to certain administrative costs, the Company and CFO will
at times share in the costs of minor expenses. Management believes that these
expenses have been appropriately accounted for by herein.
In the opinion of the Company's management, all of the above transactions
were conducted at "arms-length."
Page -38-
NOTE 14 - SHAREHOLDERS' EQUITY:
Conversion of Senior Convertible Preferred Stock
------------------------------------------------
In April 1998, the Company issued a series of its Preferred Stock, par
value $0.01 per share (the "Senior Convertible Preferred Stock"), together with
warrants (all of which expired in February 2001) to acquire shares of its Common
Stock. Each share of Senior Convertible Preferred Stock had a liquidation
preference of $100,000, and was originally convertible into Common Stock at a
price of $5.00 per share. In December 1999, the conversion price was reduced to
$0.75 per share for all of the remaining holders of Senior Convertible Preferred
Stock.
On June 8, 2002, one of the remaining two holders of the Company's Senior
Convertible Preferred Stock exercised its right to convert an aggregate of
approximately $177,000 stated value of Senior Convertible Preferred Stock, into
an aggregate of 235,648 shares of the Company's Common Stock.
As of December 31, 2002, there were approximately 0.74 shares of Senior
Convertible Preferred Stock outstanding with a stated value of approximately
$74,000, convertible into Common Stock at a rate of $0.75. The sole remaining
holder of the Company's Senior Convertible Preferred Stock has the right to
vote, as a single class, with the Common Stock, on an as-converted basis, on all
matters on which the holders of the Company's Common Stock are entitled to vote.
Series B Convertible Preferred Stock
------------------------------------
During the first quarter of 2000, the Company completed a private placement
pursuant to which it sold an aggregate of 1,677,570 units (the "Units"), each
Unit consisting of one share of the Company's Series B Convertible Preferred
Stock, par value $0.01 per share, with a liquidation preference of $7.00 per
share (the "Series B Preferred Stock"), and one warrant (the "Series B Warrant")
to purchase one-half share of Series B Preferred Stock at an exercise price, per
one-half share, equal to $7.59, exercisable from and after the expiration of the
six-month period following the date of the first issuance of such Series B
Warrants, for a period of 5 years thereafter.
Each share of Series B Preferred Stock was automatically converted into two
shares of the Company's Common Stock upon the Company's filing of an amendment
to its Certificate of Incorporation (the "Amendment") increasing its authorized
Common Stock from 28,000,000 to 50,000,000 shares, which was subject to the
Company's receipt of the approval of a majority of its shareholders. This
approval was obtained on April 17, 2000. Each Series B Warrant was initially
exercisable for one-half share of Series B Preferred Stock; however, upon the
automatic conversion of the Series B Preferred Stock into Common Stock, the
Series B Warrants (to the extent not previously exercised) became exercisable,
at the same exercise price of $7.59, for one full share of Common Stock.
In accordance with EITF Issue 98-05, "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios," the net proceeds received in the private placement (approximately
$10,618,000) were allocated based on the relative fair values of the Series B
Preferred Stock and the Series B Warrants. Accordingly, approximately $6,239,000
was allocated to the Series B Preferred Stock and $4,379,000 was allocated to
the Series B Warrants. The approximately $11,743,000 liquidation value of the
1,677,570 shares of Series B Preferred Stock was recorded net of issuance costs
of approximately $1,125,000, and net of a full discount, of which approximately
$4,379,000 was attributable to the fair value of the Series B Warrants issued in
connection therewith, and approximately $6,239,000 was attributable to the
beneficial conversion feature embodied in the Series B Preferred Stock. This
discount was accreted in its entirety as preferred dividends through April 17,
2000, the date on which all of the Series B Preferred Stock automatically
converted into shares of the Company's Common Stock (as described above) at a
ratio of 1 to 2. In connection with the private placement, the Company issued to
the placement agents an aggregate of 500,000 warrants to purchase shares of the
Company's Common Stock at an exercise price of $7.59. The fair value of these
warrants, which expire on February 13, 2005, was treated as part of the issuance
costs of the Units.
Treasury Stock Purchases
------------------------
On October 31, 2000, the Company announced a program to repurchase, in
accordance with the applicable requirements of the Securities Exchange Act of
1934, as amended, up to 1,000,000 shares of its Common Stock at prevailing
prices in open market transactions effected during the one-year period
commencing November 1, 2000. As of December 31, 2002, the Company had acquired
182,337 shares of its Common Stock pursuant to such program.
Page -39-
Issuance of Common Stock for Consulting Services
------------------------------------------------
In February 2000, the Company issued 1,000,000 shares of its Common Stock
to Rare Medium Group and Rare Medium, Inc. (collectively, "Rare"), pursuant to
the terms of an agreement entered into between Rare and the Company in
connection with the development of the Company's anticipated Internet-based
portal business for its Internet Division (Note 2). Under the terms of this
agreement, Rare was to provide professional services to assist the Internet
Division with its web-based business strategy, including the development of
multiple web sites, operations planning and other services related to building
the Internet business. The terms of the Agreement afforded Rare a
price-protection guarantee on any such shares sold in the open market at a price
of less than $3.00 per share, and contained certain "lock-up" provisions
regarding the ability to sell such shares prior to certain dates. The
Consolidated Statement of Operations for the year ended December 31, 2000 was
charged as a result of this transaction. These charges were reflected in loss
from discontinued operations. On July 5, 2001, the Company issued an additional
1,000,000 unregistered shares of its Common Stock (the fair value of which was
approximately $325,000) to Rare as part of a settlement whereby the Company's
dispute with Rare, regarding their respective obligations under the Company's
various agreements with Rare, were settled.
On January 16, 2001, the Company entered into an agreement with Goldin
Associates, L.L.C. ("Goldin") whereby Goldin agreed to provide interim
management services to the Company, for an initial six-month period, with
respect to its Sterling Optical, Insight Laser and Ambulatory Center divisions
(collectively, the "Divisions"), all at the direction of the Board of Directors
of the Company or its Chairman or other officers, pursuant to delegated
authority. The fee for such services was $50,000 per month, plus an additional
fee comprised of unregistered shares totaling 1.65% of the outstanding Common
Stock of the Company as of January 22, 2001, and warrants to purchase up to an
aggregate of 3.35% of the outstanding Common Stock of the Company. As a result,
the Company issued 418,719 unregistered shares of its Common Stock (the fair
value of which was approximately $108,000 and was charged directly to
operations) to Goldin, along with warrants to purchase up to an additional
850,126 shares of Common Stock, all at an exercise price of $0.01, subject to
the Company achieving certain earnings targets (the "Incentive Fee"). In
connection with the shares issued, Goldin was granted certain limited piggy-back
registration rights.
The terms of the Incentive Fee provide that the warrants may only be
exercised according to the following schedule: (1) warrants to purchase 279,146
shares of the Company's Common Stock immediately following a year in which the
Divisions shall realize earnings before interest, taxes, depreciation and
amortization ("EBITDA") of at least $1,000,000; (2) warrants to purchase an
additional 279,146 shares of the Company's Common Stock immediately following a
year in which the Divisions shall realize EBITDA of at least $2,000,000; and (3)
warrants to purchase an additional 291,834 shares of the Company's Common Stock
immediately following a year in which the Divisions shall realize EBITDA of at
least $3,000,000. These warrants become exercisable only if the applicable
EBITDA targets are achieved prior to December 31, 2004. Due to these
contingencies, the future valuation of these warrants, if and when they become
exercisable, will result in charges to the Company's results of operations in
future periods. Any warrants that vest will expire on January 22, 2008.
On April 26, 2001, the Company's Board of Directors approved the terms of
an agreement whereby it agreed to issue to Balfour Investors Incorporated
("Balfour"), in exchange for certain advisory services rendered to the Company's
Board of Directors, 209,359 unregistered shares of its Common Stock (the fair
value of which was approximately $57,000 and was charged directly to
operations), together with warrants to purchase up to 425,063 additional shares
of Common Stock at an exercise price of $0.01. In connection with the shares
issued, Balfour was granted certain limited piggy-back registration rights. The
warrants will become exercisable according to the following schedule: (1)
warrants to purchase 139,573 shares of the Company's Common Stock immediately
following a year in which the Divisions shall realize EBITDA of at least
$1,000,000; (2) warrants to purchase an additional 139,573 shares of the
Company's Common Stock immediately following a year in which the Divisions shall
realize EBITDA of at least $2,000,000; and (3) warrants to purchase an
additional 145,917 shares of the Company's Common Stock immediately following a
year in which the Divisions shall realize EBITDA of at least $3,000,000.
Further, these warrants become exercisable only if the applicable EBITDA targets
are achieved prior to December 31, 2004. Due to these contingencies, the future
valuation of these warrants, if and when they become exercisable, will result in
charges to the Company's results of operations in future periods. Any warrants
that vest will expire on April 26, 2008.
Delisting of Common Stock
-------------------------
On August 23, 2001, the Company notified The Nasdaq Stock Market, Inc.
("Nasdaq") of its Board of Directors' intention not to effect, in the near
future, a reverse stock split of its outstanding shares of Common Stock. In
response to this decision, on August 24, 2001, Nasdaq delisted the Company's
Common Stock from the Nasdaq National Market System ("Nasdaq-NMS"), pursuant to
Marketplace Rule No. 4310(c)(8)(B), due to its failure to comply with the
minimum bid price ($1.00) requirement for the continued listing of its shares of
Common Stock on the Nasdaq-NMS, all set forth in Nasdaq's Marketplace Rule No.
4450(a)(5). As a result, the Company's Common Stock now trades on the OTC
Bulletin Board under the symbol ISEE.OB.
Page -40-
Increase in Authorized Number of Shares of Common Stock
-------------------------------------------------------
On April 29, 2002, the Board unanimously voted to recommend to the
shareholders that the Company's Certificate of Incorporation be amended to
increase the number of authorized shares of its Common Stock from 50,000,000 to
150,000,000 shares, and to increase the total number of authorized shares of its
capital stock from 55,000,000 to 155,000,000. On July 11, 2002, the Company's
shareholders approved of such amendment, which was thereafter filed by the
Company.
Shareholder Rights Offering
---------------------------
On April 29, 2002, the Board unanimously approved of the Company's
initiation of a shareholder rights offering (the "Rights Offering), whereby the
Company would attempt to raise approximately $2,000,000 of gross proceeds. On
February 10, 2003, the Company released the final terms of the Rights Offering
and filed an amended registration statement (which was declared effective
February 12, 2003) with the Securities and Exchange Commission. The Rights
Offering consists of 50,000,000 units, with each unit consisting of one share of
the Company's Common Stock and a warrant, having a term of twelve months, to
purchase one additional share of Common Stock at an exercise price equal to
$0.05, unless the average of the last reported sales price of its Common Stock,
as quoted on the OTC Bulletin Board, during the fifteen trading days immediately
preceding, and including, April 7, 2003 is $0.125 or more and the average number
of shares traded during each of those fifteen trading days is 50,000 or more, in
which case the exercise price will be equal to $0.06, or if the same volume
conditions are met but the average of the last reported sales prices is $0.195
or more, in which case the exercise price will be equal to $0.07.
Each shareholder will be granted approximately 1.67 non-transferable rights
for every share of Common Stock owned as of February 25, 2003, the record date.
Each right will be exercisable for one unit at a price of $0.04, the proceeds of
which will be used to repay the amounts outstanding under the Company's existing
credit facility and term loan (Note 11), to fund its plan to close
non-profitable stores (Note 8) and for general corporate and working capital
purposes. The Rights Offering commenced on February 27, 2003 and will continue
until 5:00 p.m. on April 14, 2003.
In addition, an oversubscription privilege was included, allowing
shareholders to subscribe for additional units not subscribed for by other
shareholders, pro rata, based on the number of units purchased under the basic
subscription privilege. No fractional rights will be issued, but the Company
will round the number of rights its shareholders receive down to the nearest
whole number.
NOTE 15 - STOCK OPTIONS AND WARRANTS:
Sterling Stock Option Plan
--------------------------
In April 1995, the Company adopted a Stock Incentive Plan (the "Plan") that
permits the issuance of options to selected employees and directors of, and
consultants to, the Company. The Plan, as amended, reserves 7,000,000 shares of
Common Stock for grant and provides that the term of each award be determined by
the Compensation Committee of the Board of Directors (the "Committee") charged
with administering the Plan. Under the terms of the Plan, options may be
qualified or non-qualified and granted at exercise prices and for terms to be
determined by the Committee. Additionally, certain options previously issued
under the Plan provide that notwithstanding the termination of the Company's
employment of any such employee/holder, he/she will retain the right to exercise
those options that have previously vested in his/her favor until such time that
the options expire in accordance with the terms of the original grant.
Page -41-
A summary of the options previously issued under the Plan is presented in
the table below:
2002 2001 2000
------------------------- --------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------- --------------------------- -----------------------
Options outstanding, beginning of period 5,398,133 $ 4.07 5,590,966 $ 6.54 3,571,624 $ 5.52
Granted 150,000 $ 0.08 2,194,000 $ 0.32 3,207,500 $ 7.32
Exercised - $ - - $ - (855,657) $ 5.44
Canceled, forfeited or expired (1,277,665) $ 3.90 (2,386,833) $ 6.39 (332,501) $ 6.24
--------- ---------- ---------- ---------- --------- ----------
Options outstanding, end of period 4,270,468 $ 3.98 5,398,133 $ 4.07 5,590,966 $ 6.54
========= ========== ========== ========== ========= ==========
Options exercisable, end of period 4,118,809 $ 4.12 4,320,300 $ 4.80 2,823,466 $ 6.24
========= ========== ========== ========== ========= ==========
Of the total options outstanding as of December 31, 2002, there were
533,334 held by current employees of the Company, and 3,737,134 held by
directors of the Company, outside consultants and former employees. Of the total
options granted during 2002, 150,000 were granted to employees of the Company.
There were no grants during 2002 to directors of the Company, outside
consultants and former employees.
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 2002:
Options Outstanding Options Exercisable
---------------------------------------------------------- ------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Remaining Exercise Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
---------------- ------------- ------------------ ------------- ------------- ---------------
$0.08 to $0.12 150,000 9.12 $ 0.08 150,000 $ 0.08
$0.21 to $0.32 925,000 4.90 $ 0.25 925,000 $ 0.25
$0.33 to $0.50 553,334 8.32 $ 0.33 401,675 $ 0.33
$1.78 to $2.67 5,000 6.83 $ 1.88 5,000 $ 1.88
$2.68 to $4.02 608,000 6.07 $ 3.25 608,000 $ 3.25
$4.03 to $6.05 860,467 3.67 $ 5.94 860,467 $ 5.94
$6.06 to $8.25 1,168,667 6.89 $ 8.10 1,168,667 $ 8.10
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
2002 2001 2000
------ ------ ------
Expected life (years) 1 5 5
Interest rate 2.21% 4.80% 6.13%
Volatility 114% 114% 108%
Dividend yield - - -
Page -42-
The Company has adopted the pro forma disclosure provisions of SFAS No.
123. Accordingly, no compensation cost has been recognized for those options
issued, under the Plan, to employees. Had compensation cost for the Company's
Plan been determined under SFAS No. 123, the Company's net loss and net loss per
share would approximate the pro forma amounts presented below (in thousands):
2002 2001 2000
------------- ------------- -------------
Net loss attributable to common shareholders:
As reported $ (4,665) $ (3,776) $ (72,442)
Pro forma $ (8,318) $ (8,916) $ (82,501)
Net loss per share - basic and diluted:
As reported $ (0.17) $ (0.14) $ (3.07)
Pro forma $ (0.29) $ (0.34) $ (3.49)
In 2000, the Company recognized $94,000 of expense related to its issuance
of stock options and warrants to certain non-employee consultants to the
Company. The Company incurred no such expenses in 2002 or 2001.
As discussed in Note 3, in December 2002, the FASB issued SFAS No. 148,
which provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company is adopting the
provisions of SFAS No. 148 prospectively from January 1, 2003.
Stock Purchase Warrants
-----------------------
In December 1999, the Company issued 2,500,000 warrants to MY2000, LLC, an
entity acting as an independent advisor to the Company in connection with its
planned Internet business and strategy (Note 2), to purchase 2,500,000 shares of
the Company's Common Stock at a price of $2.00 per share, the fair value on the
date of issuance. In 1999, the Company recognized approximately $2,000,000 in
expense representing the fair value of the warrants granted. A principal of
MY2000, LLC, was also an executive of the entity the Company had retained and
paid, in cash and stock, to develop and launch its business-to-business web
sites and related strategy. During the first quarter of 2000, MY2000, LLC
exercised 1,000,000 of these warrants, the remaining 1,500,000 being unexercised
as of December 31, 2001, and expire on December 2, 2004.
In January 2001, the Company issued 850,126 warrants to Goldin (Note 14).
These warrants are only exercisable upon the achievement of certain EBITDA
targets by the Company, and expire on January 22, 2008.
In April 2001, the Company issued 425,063 warrants to Balfour (Note 14).
These warrants are only exercisable upon the achievement of certain EBITDA
targets by the Company, and expire on April 26, 2008.
On January 23, 2002, in connection with obtaining its financing
arrangements (Note 11), the Company granted Horizons, an aggregate of 2,500,000
warrants (1,750,000 of which were immediately exercisable, with the balance
vesting in quarterly increments of 250,000, beginning April 22, 2002, subject to
any amounts then remaining unpaid under the secured term note and/or credit
facility). The warrants had a five-year term and provided for an exercise price
of $0.01 per share. The fair value of these warrants (valued using the
Black-Scholes model) was approximately $234,000. On May 1, 2002, July 22, 2002
and October 22, 2002, respectively, Horizons exercised 2,000,000, 250,000 and
250,000 of such warrants.
NOTE 16 - 401(K) EMPLOYEE SAVINGS PLANS:
Emerging Vision, Inc. and VisionCare of California, Inc., each sponsor a
401(k) Employee Savings Plan (the "401(k) Plan") to provide all qualified
employees of these entities with retirement benefits. Presently, the
administrative costs of each 401(k) Plan are paid entirely by such qualified
employees, no matching contributions having been provided by the Company.
Page -43-
NOTE 17 - FOURTH QUARTER CHARGES:
In the fourth quarter of 2002, the Company recognized provisions for
doubtful accounts of approximately $1,105,000 related to certain of its
franchise receivables and notes that management deemed uncollectible for various
reasons, along with certain managed care receivables that were deemed
uncollectible. The Company also recorded fourth quarter charges of approximately
$303,000 related to estimated closure costs of certain Company-owned stores
(Note 8), and $668,000 for certain legal contingencies.
Page -44-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------------------
On April 29, 2002, the Audit Committee of the Board of Directors (the
"Board") of Emerging Vision, Inc. (the "Company") recommended that the Company
discontinue the retention of Arthur Andersen LLP ("Andersen") for future audits
of its financial statements and, on June 18, 2002, the Company formally
dismissed Andersen as its independent public accountants.
Andersen's report on the Company's financial statements for either of the
past two fiscal years contained no adverse opinion or disclaimer of opinion, and
was not qualified or modified as to uncertainty, audit scope or accounting
principles.
During the Company's two most recent fiscal years and any subsequent period
through June 18, 2002, there was no disagreement with Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement if not resolved to the satisfaction of
Andersen would have caused it to make reference thereto in its report on the
Company's consolidated financial statements, and there were no reportable
events, as defined in Regulation S-K Item 304(a)(1)(v).
During the Company's two most recent fiscal years and any subsequent period
through June 18, 2002, the Company had not consulted with any independent public
accountants regarding either (i) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, in respect
of which either a written report was provided to the Company or oral advice was
provided; or (ii) any matter that was either the subject of a disagreement, as
that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K, or a reportable event.
On August 5, 2002, the Audit Committee recommended to the Board that it
select Miller Ellin & Company LLP ("Miller Ellin") as its new independent public
accountants, which recommendation was accepted and unanimously passed by the
Board and, on August 7, 2002, the Company engaged Miller Ellin as its new
independent public accountants for the year ended December 31, 2002.
During the Company's two most recent fiscal years and any subsequent period
through August 7, 2002, the Company had not consulted with Miller Ellin
regarding either (i) the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on the Company's financial statements, in respect of which
either a written report was provided to the Company or oral advice was provided
that Miller Ellin concluded was an important factor considered by the Company in
reaching a decision as to the accounting, auditing or financial reporting issue;
or (ii) any matter that was either the subject of a disagreement, as that term
is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions
to Item 304 of Regulation S-K, or a reportable event (as described in Item
304(a)(1)(v) of Regulation S-K).
Page -45-
PART III
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
The Board presently consists of four directors, not including Mr. William
F. Stasior and Mr. Robert S. Hillman, who resigned as of September 1, 2002 and
May 30, 2002, respectively. The directors of Emerging Vision, Inc. ("EVI" or the
"Company") are divided into two classes, designated as Class 1 and Class 2,
respectively. Directors of each Class are elected at the Annual Meeting of the
Shareholders of EVI held in the year in which the term of such Class expires,
and serve thereafter for two years, or until their respective successors are
duly elected and qualified or their earlier resignation, removal from office,
retirement or death. Mr. Benito R. Fernandez presently serves as Class 1
Director and is scheduled to hold office until the 2004 Annual Meeting of
Shareholders. Drs. Robert and Alan Cohen, and Mr. Joel L. Gold, presently serve
as Class 2 Directors and are scheduled to hold office until the 2003 Annual
Meeting of Shareholders.
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of EVI are as follows:
Name Age Position
Alan Cohen, O.D. 52 Chairman of the Board of Directors
Robert Cohen, O.D. 59 Director
Benito R. Fernandez 61 Director
Joel L. Gold 61 Director
Christopher G. Payan 28 Co-Chief Operating Officer, Chief
Financial Officer, Senior Vice President,
Secretary and Treasurer
Samuel Z. Herskowitz 33 Co-Chief Operating Officer and Chief
Marketing Officer
Myles Lewis 35 Co-Chief Operating Officer and Senior Vice
President - Business Development
Dr. Nicholas Shashati 43 President - VisionCare of California,
Inc. ("VCC")
Dr. Alan Cohen has served as a director of the Company since its inception;
and, as of May 31, 2002, became the Company's Chairman of the Board of
Directors. He also served as Chief Operating Officer of the Company from 1992
until October 1995, when he became Vice Chairman of the Board of Directors, and
as the Company's President, Chief Executive Officer and Chief Operating Officer
from October 1998 through April 17, 2000, when he became President of the
Company's retail optical store division, which position Dr. Cohen resigned from
on January 9, 2001. Dr. Cohen, together with his brother, Dr. Robert Cohen, is
the owner of Meadows Management, LLC ("Meadows"), which, until April 9, 2000,
rendered consulting services to the Company. From 1974 to the present, Dr. Alan
Cohen has been engaged in the retail and wholesale optical business. For more
than 10 years, Dr. Cohen has also been a director, principal shareholder and
officer of Cohen Fashion Optical, Inc. and its affiliates ("CFO"), which
currently maintains its principal offices in Garden City, New York; and, since
January 15, 2001, as President of General Vision Services, LLC ("GVS"), which
currently maintains its principal offices in New York City. Dr. Cohen and his
brother, Dr. Robert Cohen, are also shareholders of CFO and members of GVS. CFO
and GVS each engage in the operation (and, in the case of CFO, franchising) of
retail optical stores similar to those operated and franchised by the Company.
Dr. Cohen is also an officer and a director of several privately held management
and real estate companies and other businesses. Dr. Cohen graduated from the
Pennsylvania School of Optometry in 1972, where he received a Doctor of
Optometry degree.
Dr. Robert Cohen served as Chairman of the Board of Directors of the
Company from its inception through April 7, 2000, when he resigned as Chairman,
but not as a director. He also served as Chief Executive Officer of the Company
from its inception until October 1995. Dr. Cohen, together with his brother, Dr.
Alan Cohen, is the owner of Meadows, which, until April 9, 2000, rendered
consulting services to the Company. From 1968 to the present, Dr. Robert Cohen
has been engaged in the retail and wholesale optical business. For more than 10
years, Dr. Cohen has also served as President and a director of CFO; and, since
January 15, 2001, as the Chief Executive Officer of GVS. Dr. Cohen and his
brother, Dr. Alan Cohen, are also shareholders of CFO and members of GVS. Dr.
Cohen is also an officer and a director of several privately held management and
real estate companies and other businesses. Dr. Cohen graduated from the
Pennsylvania School of Optometry in 1968, where he received a Doctor of
Optometry degree.
Page -46-
Benito R. Fernandez was appointed as a director of the Company as of June
12, 2001. Since 1986, Mr. Fernandez has been the President of Horizons, located
in Albany, New York, an entity which owns, develops and manages real estate
properties, and which also acts as agent for various companies in the health
field, as well as the President of Horizons Hotels Corp., located in San Juan,
Puerto Rico, which owns and manages hotel properties. In addition, since 1980,
Mr. Fernandez has been the President of the Brooklyn Manor Group, located in
Brooklyn, New York, an entity which owns and manages a health care facility and
acts as a consultant to various health related facilities; and, since 1973, has
been the President of Typhoon Fence of L.I., Inc., the operator of a fence
construction company located in Long Island, New York. Mr. Fernandez, who was a
former member of the Federal Reserve Bank of New York Advisory Council of Small
Business and Agriculture, graduated from the City University of the City of New
York in 1966, where he received his B.A.. In 1999, he received The South Bronx
Board of Trades and The Somos Uno Foundation Award for outstanding professional
leadership in economic development; in 1995, he received the Bedford Stuyvesant
Y.M.C.A. Man of the Year Award; and, in 1990, he received the New York State
Puerto Rican/Hispanic Legislator Task Force Conference Center Award for
excellence in advancing business opportunities for Puerto Ricans and Latinos.
Joel L. Gold has served as a director of the Company since December 1995.
He is currently Executive Vice President of Investment Banking of Berry Shino
Securities, Inc., an investment banking firm located in New York City. From
January 1999 until December 1999, he was an Executive Vice President of Solid
Capital Markets, an investment banking firm also located in New York City. From
September 1997 to January 1999, he served as a Senior Managing Director of
Interbank Capital Group, LLC, an investment banking firm also located in New
York City. From April 1996 to September 1997, Mr. Gold was an Executive Vice
President of LT Lawrence & Co., and from March 1995 to April 1996, a Managing
Director of Fechtor Detwiler & Co., Inc., a representative of the underwriters
for the Company's initial public offering. Mr. Gold was a Managing Director of
Furman Selz Incorporated from January 1992 until March 1995. From April 1990
until January 1992, Mr. Gold was a Managing Director of Bear Stearns and Co.,
Inc. ("Bear Stearns"). For approximately 20 years before he became affiliated
with Bear Stearns, he held various positions with Drexel Burnham Lambert, Inc.
He is currently a director, and serves on the Compensation Committee of, PMCC
Financial Corp. ("PMCC"), a publicly held specialty, consumer finance company.
Christopher G. Payan joined the Company as its Vice President of Finance in
July 2001. In October 2001, he was appointed as its Senior Vice President, Chief
Financial Officer, Secretary and Treasurer; and, on April 29, 2002, was
appointed as one of its Chief Operating Officers. From March 1995 through July
2001, Mr. Payan was employed by Arthur Andersen LLP, at the time, one of the
world's largest professional services firms, where he provided various audit,
accounting, consulting and advisory services to various small and mid-sized
companies in various industries. Mr. Payan is a certified public accountant and
holds a Bachelors of Science degree, graduating cum laude, with honors, from
C.W. Post - Long Island University.
Samuel Z. Herskowitz joined the Company in January 1996 and, effective
April 29, 2002, was appointed as one of its Chief Operating Officers, as well as
its Chief Marketing Officer. From 1996 to April 1997, Mr. Herskowitz served as
the Director of Operations of EVI's then wholly-owned subsidiary, Insight Laser
Centers, Inc. In April 1997, Mr. Herskowitz became responsible for the Company's
corporate communications and, in January 1998, was appointed to the position of
Director of Marketing and Advertising of the Company, in which position he
served until April 1999, when he became the Company's Vice President - Marketing
and Advertising. From 1993 to December 1996, Mr. Herskowitz was the Director of
Public Relations for Rosenblum Eye Centers located in New York City. Mr.
Herskowitz received a Masters in Business Administration from Baruch College of
the City University of New York in May 1995.
Myles Lewis joined the Company in October 1999 as its Vice President -
Managed Care and, effective April 29, 2002, was appointed as one of the
Company's Chief Operating Officers and its Senior Vice President - Business
Development. From October 1998 to September 1999, Mr. Lewis served as Vice
President of Managed Care for Vista Eyecare, Inc., located in Lawrenceville,
Georgia, as well as President of ProCare Eye Exam, Inc., Vista's health
maintenance organization located in the State of California. From January 1993
to September 1998, Mr. Lewis was employed by New West Eyeworks, located in
Tempe, Arizona, in various executive capacities, including Vice President -
Managed Care, President of Vista Eyecare Network, LLC, a managed care company
owned by New West Eyeworks, and Director of Strategic Projects and Operations.
Mr. Lewis graduated from Arizona State University in 1991, where he received a
Bachelors of Science degree in Management.
Dr. Nicholas Shashati has been the Director of Professional Services of the
Company since July 1992 and, since March 1, 1998, the President of the Company's
wholly owned subsidiary, VCC. Dr. Shashati earned a Doctor of Optometry degree
from Pacific University of California in 1984, and received a Bachelor of Visual
Science degree from Pacific University and a Bachelor of Science degree in
Biology from San Diego State University. Dr. Shashati is licensed as an
optometrist in the States of New York, California, Arizona and Oregon. He is
Chairperson for the Quality Assurance Committee of the Company, as well as a
Practice Management Consultant.
Page -47-
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
EVI's executive officers and directors, and persons who own more than ten
percent of a registered class of EVI's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Executive officers, directors and greater than ten percent
shareholders are required, by SEC regulation, to furnish EVI with copies of all
Section 16(a) forms they may file.
Based solely on a review of the copies of such forms furnished to EVI, or
written representations that no Forms 5 were required, EVI believes that, during
the year ended December 31, 2002, all Section 16(a) filing requirements
applicable to its executive officers, directors and greater than ten percent
beneficial owners were complied with, except that Mr. Fernandez filed certain of
his Forms 4 after the required deadlines.
Page -48-
Item 11. Executive Compensation
-------------------------------
The following Summary Compensation Table sets forth the compensation, for
the three years ended December 31, 2002, of: (i) each individual who served as
the Chief Executive Officer of EVI during the year ended December 31, 2002; and
(ii) each of the Company's four most highly-compensated executive officers who
were serving as executive officers of the Company and/or VCC as of December 31,
2002 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
================================= ====== ========================== ============= ========================
Long-Term
Compensation
Securities
Fiscal Annual Compensation Underlying All Other
Name and Principal Position Year Salary Bonus Stock Options Compensation
--------------------------------- ------ -------------------------- ------------- ------------------------
Robert S. Hillman, 2002 $115,000 (2) $ - - $ 27,000 (5)
Former President and Chief 2001 $115,000 (3) $ - 500,000 (4) $ 22,000 (6)
Executive Officer (1)
--------------------------------- ------ -------------------------- ------------- ------------------------
Christopher G. Payan, 2002 $169,000 (8) $ - 150,000 (10) $ 6,000 (12)
Senior Vice President, Co-Chief 2001 $ 57,000 (9) $ - 50,000 (11) $ -
Operating Officer, Chief
Financial Officer, Treasurer and
Secretary (7)
--------------------------------- ------ -------------------------- ------------- ------------------------
Myles S. Lewis, 2002 $156,000 (13) $ - - $ 3,000 (16)
Co-Chief Operating Officer and 2001 $118,000 (14) $ - 50,000 (15) $ 1,000 (17)
Senior Vice President - Business 2000 $150,000 (13) $ - - $ 13,000 (18)
Development (12)
--------------------------------- ------ -------------------------- ------------- ------------------------
Samuel Z. Herskowitz, 2002 $125,000 (20) $ - $ 11,000 (22)
Co-Chief Operating Officer and 2001 $110,000 (20) $ - - $ 8,000 (22)
Chief Marketing Officer (19) 2000 $ 98,000 (20) $ - 37,500 (21) $ 10,000 (22)
--------------------------------- ------ -------------------------- ------------- ------------------------
Dr. Nicholas Shashati, 2002 $102,000 (23) $ - - $ 24,000 (25)
President - VisionCare of 2001 $102,000 (23) $ - 100,000 (24) $ 24,000 (25)
California 2000 $102,000 (23) $ - - $ 6,000 (25)
================================= ====== ========================== ============= ========================
(1) Mr. Hillman became the President, Chief Executive Officer and Chairman
of the Board of Directors of the Company on July 2, 2001, which positions he
resigned from on May 30, 2002.
(2) Represents salary paid to Mr. Hillman for the period from January 1,
2002 through May 30, 2002.
(3) Represents salary paid to Mr. Hillman for the period from July 2, 2001
through December 31, 2001.
(4) All of these options were cancelled as a result of Mr. Hillman's
resignation from the Company on May 30, 2002.
(5) Represents automobile lease payments made on behalf of Mr. Hillman, the
costs of insuring such automobile, and corporate apartment lease payments made
on behalf of Mr. Hillman, for the period from January 1, 2002 through May 30,
2002.
(6) Represents automobile lease payments made on behalf of Mr. Hillman, the
costs of insuring such automobile, and corporate apartment lease payments made
on behalf of Mr. Hillman, for the period from July 2, 2001 through December 31,
2001.
(7) Mr. Payan became Vice President of Finance of the Company on July 16,
2001, Senior Vice President, Chief Financial Officer, Treasurer and Secretary of
the Company in October 2001, and one of the Company's Chief Operating Officers
on April 29, 2002.
(8) Represents salary paid to Mr. Payan for the year ended December 31,
2002.
(9) Represents salary paid to Mr. Payan for the period from July 16, 2001
through December 31, 2001.
(10) All of these options were exercised on February 20, 2003.
(11) All of these options are fully vested and exercisable.
Page -49-
(12) Mr. Lewis was originally employed as the President of the Company's
Insight Managed Care Division for the period from October 12, 1999 through
January 19, 2001, when he resigned from the Company. Mr. Lewis was rehired on
April 30, 2001 as the Company's Vice President - Business Development. On April
29, 2002, Mr. Lewis became one of the Company's Chief Operating Officers and its
Senior Vice President - Business Development.
(13) Represents salary paid to Mr. Lewis.
(14) Represents salary paid to Mr. Lewis for the period from January 1,
2001 through January 19, 2001 and for the period from April 30, 2001 through
December 31, 2001.
(15) Two-thirds of these options are fully vested; and an additional
one-third will vest on April 26, 2004, provided that, at that time, Mr. Lewis is
still employed by the Company.
(16) Represents car allowance payments made to Mr. Lewis.
(17) Represents health insurance payments made on behalf of Mr. Lewis for
the period from January 1, 2001 through January 19, 2001 and for the period from
April 30, 2001 through December 31, 2001.
(18) Represents car allowance payments made to Mr. Lewis and health
insurance payments made on behalf of Mr. Lewis.
(19) Mr. Herskowitz served as Director of Marketing and Advertising of the
Company until January 2, 2001, when he became Vice President - Marketing and
Advertising. On April 29, 2002, Mr. Herskowitz became one of the Company's Chief
Operating Officers and its Chief Marketing Officer.
(20) Represents salary paid to Mr. Herskowitz.
(21) One-third of these options are fully vested; and an additional
one-third will vest on each of April 26, 2003 and 2004, provided that, at that
time, Mr. Herskowitz is still employed by the Company.
(22) Represents car allowance payments made to Mr. Herskowitz.
(23) Represents salary paid to Dr. Shashati by VCC.
(24) One-third of these options are fully vested; and an additional
one-third will vest on each of April 26, 2003 and 2004, provided that Dr.
Shashati is then still employed by the Company.
(25) Includes car allowance payments made to Dr. Shashati by VCC and
additional salary paid to Dr. Shashati by the Company.
OPTION GRANTS IN LAST FISCAL YEAR
On February 11, 2002, EVI's Compensation Committee (the "Committee")
granted to Christopher G. Payan, its, at the time, Senior Vice President, Chief
Financial Officer, Secretary and Treasurer, additional options to purchase
150,000 shares of EVI's Common Stock, each of which had a term of ten (10) years
and provided for an exercise price equal to the closing price of EVI's Common
Stock, as quoted on the OTC Bulletin Board (the "Closing Price") on the date of
grant, and each of which vested immediately. This was the sole option grant, by
the Committee, to a Named Executive Officer during the fiscal year ended
December 31, 2002.
The following table sets forth information concerning the sole option
granted, during 2002, to a Named Executive Officer of the Company:
Number of % of Total Potential Realizable Value of
Shares Options Assumed Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation
Options Employees in Price Expiration for Option Term
Name Granted Fiscal Year Per Share Date 5% 10%
-------------------- ---------- ------------- ----------- ------------ ------------------------------
Christopher G. Payan 150,000 100% $0.075 2/11/12(*) $7,000 $18,000
(*) All options were exercised on February 20, 2003.
Reference is made to Note 15 to the Consolidated Financial Statements for
more detailed information regarding the Company's equity compensation plans. The
following provides certain information with respect to the Company's equity
compensation plans as of December 31, 2002:
(A) (B) (C)
Number of securities
Number of securities to be available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation
outstanding options and price of outstanding options plan (exludes securities
Plan Category warrants and warrants reflected in column (A)
------------------------------- -------------------------- ---------------------------- -------------------------------
Authorized by shareholders 4,270,468 $3.98 2,729,532
Not authorized by shareholders 2,775,189 $1.08 -
------------------------------- -------------------------- ---------------------------- -------------------------------
Page -50-
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised In-the-Money
on Value Options at FY-End (#) Options at FY-End ($)*
Name Exercise Realized
(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
--------------------------- ------------ ------------ ------------------------------- ------------------------------------
Christopher G. Payan - $ - 200,000/-0- $0.00/$0.00
--------------------------- ------------ ------------ ------------------------------- ------------------------------------
Myles S. Lewis - $ - 33,334/16,666 $0.00/$0.00
--------------------------- ------------ ------------ ------------------------------- ------------------------------------
Samuel Z. Herskowitz - $ - 42,500/25,000 $0.00/$0.00
--------------------------- ------------ ------------ ------------------------------- ------------------------------------
Dr. Nicholas Shashati - $ - 73,334/66,666 $0.00/$0.00
--------------------------- ------------ ------------ ------------------------------- ------------------------------------
* Based on the OTC Bulletin Board closing price for the last business day
of the fiscal year ($0.05). The stock options granted to the Named Executive
Officers have exercise prices as follows: Christopher G. Payan: 150,000 options
at $0.075, and 50,000 options at $0.26; Myles S. Lewis: 50,000 options at $0.33;
Samuel Z. Herskowitz: 37,500 options at $0.33, 20,000 options at $6.31, and
10,000 options at $3.25; and Dr. Nicholas Shashati: 100,000 options at $0.33,
20,000 options at $6.31, 10,000 options at $3.25, and 10,000 options at $7.50.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee (the "Committee") are
Benito R. Fernandez, Dr. Alan Cohen and Joel L. Gold. Additionally, Robert S.
Hillman served on the Committee until May 30, 2002.
EMPLOYMENT CONTRACTS
Effective February 11, 2002, the Company and Mr. Christopher G. Payan
entered into a three-year employment agreement pursuant to which he was
appointed as the Company's Senior Vice President, Co-Chief Operating Officer,
Chief Financial Officer, Secretary and Treasurer. Pursuant to the agreement, Mr.
Payan will initially be paid an annual base salary of $175,000 per year, will
receive a monthly automobile allowance of $600, and is entitled to an annual
bonus in an amount equal to 5% by which the earnings before interest, taxes,
depreciation and amortization ("EBITDA"), as defined, exceeds $2,000,000, in any
year ending December 31st.
In addition, pursuant to the terms of said agreement, Mr. Payan was granted
150,000 employee stock options, all of which were immediately vested (and which
Mr. Payan subsequently exercised on February 20, 2003), and the 50,000 employee
stock options granted to Mr. Payan on July 16, 2001 became immediately vested.
OPERATION OF THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 2002, the Board held two meetings
in person, held two additional meetings telephonically, and acted by unanimous
written consent three times. Each director (including Messrs. Robert S. Hillman
and William F. Stasior, who resigned as directors on May 30, 2002 and September
1, 2002, respectively) attended at least 75% of the meetings held by the Board
during the period in which such director served, including the meetings held by
the Committees on which such director served.
Committees of the Board
The standing committees of the Board include the Executive Committee, the
Audit Committee, the Compensation Committee and the Independent Committee.
Page -51-
The Executive Committee, whose members are currently Benito R. Fernandez,
Robert Cohen and Joel L. Gold (and whose members, from time to time during the
2002 fiscal year, also included Robert S. Hillman) is generally authorized to
exercise the powers of the Board in connection with the management of the
Company; provided, however, that the Executive Committee does not have the
authority to submit to shareholders any action that needs shareholder approval
under law, fill vacancies in the Board or in any Committee, fix the compensation
of directors for serving on the Board or on any Committee, amend or repeal the
By-Laws of the Company or adopt new by-laws of the Company, or amend the
Company's Certificate of Incorporation. The Executive Committee was established
in December 1995 and, during the year ended December 31, 2002, acted four times
by unanimous written consent.
The Audit Committee, whose members currently are Robert Cohen, Benito R.
Fernandez and Joel L. Gold (and whose members, from time to time during the 2002
fiscal year, also included William F. Stasior), recommends the selection of the
Company's independent auditors, receives reports from such independent auditors
on any material recommendations made to management, and reviews, with the
auditors, any material questions or problems with respect to the accounting
records, procedures or operations of the Company which have not been resolved to
their satisfaction after having been brought to the attention of management. The
Audit Committee, which was established in December 1995, met once in person
during the year ended December 31, 2002 and five times telephonically.
The Compensation Committee, whose members currently are Alan Cohen, Benito
R. Fernandez and Joel L. Gold (and whose members, from time to time during the
2002 fiscal year, also included Robert S. Hillman) administers EVI's 1995 Stock
Incentive Plan and recommends to the Board the salaries and bonuses of the
executive officers of the Company. The Compensation Committee was established in
December 1995 and, during the year ended December 31, 2002, acted two times by
unanimous written consent.
The Independent Committee, whose members currently are Benito R. Fernandez
and Joel L. Gold (and whose members, from time to time during the 2002 fiscal
year, also included William F. Stasior), is generally authorized to review any
transaction (or series of transactions) involving more than $10,000 in any
single instance, or more than $50,000 in the aggregate (other than compensation
matters which are determined by the Compensation Committee) between the Company
and: (i) any of its directors, officers, principal shareholders and/or each of
their respective affiliates; or (ii) any employee of, or consultant to, the
Company who also renders services to CFO and/or GVS, retail optical companies
owned, in part, by certain directors and shareholders of the Company, whether or
not for compensation. The Independent Committee was established in December 1995
and, during the year ended December 31, 2002, acted once by unanimous written
consent.
DIRECTOR COMPENSATION
Directors who are not employees or executive officers of the Company, or
associated with the Company, receive $1,000 for each Board and Committee meeting
attended in person, and $250 for each Board and Committee meeting attended
telephonically. Further, all directors are reimbursed for certain expenses in
connection with their attendance at Board and Committee meetings.
Other than with respect to the reimbursement of expenses, directors who are
employees or executive officers of the Company will not receive additional
compensation for serving as a director. Item 12. Security Ownership of Certain
Beneficial Owners and Management
Page -52-
I. COMMON STOCK:
------------
The following table sets forth certain information, as of March 24, 2003,
regarding the beneficial ownership of the Common Stock by: (i) each shareholder
known by the Company to be the beneficial owner of more than five percent of the
outstanding shares of EVI's Common Stock; (ii) each director of the Company;
(iii) each Named Executive Officer of the Company (as said term is defined under
the caption "Executive Compensation" above); and (iv) all directors and
executive officers of the Company as a group. The percentages in the "Percent of
Class" column do not give effect to shares included in the "Beneficial
Ownership" column as a result of the ownership of options or warrants. Unless
otherwise indicated, the Company believes that the beneficial owners of the
Common Stock listed below, based on information provided by such owners, have
sole investment and voting power with respect to such shares. The address of
Benito R. Fernandez is 2830 Pitkin Avenue, Brooklyn, New York 11208. The address
of Joel L. Gold is c/o Berry Shino Securities, 45 Broadway, New York, New York
10006. The address of Nicholas Shashati is c/o Sterling VisionCare, 9663 Tierra
Grande Street, San Diego, California 92126. The address of all other persons
listed below is 100 Quentin Roosevelt Boulevard, Garden City, New York 11530.
--------------------------- ----------------------- ----------------------------
Name Beneficial Ownership Percent of Class
--------------------------- ----------------------- ----------------------------
Robert S. Hillman (c) - (1) *
--------------------------- ----------------------- ----------------------------
Christopher G. Payan (b) 261,500 (2) *
--------------------------- ----------------------- ----------------------------
Myles S. Lewis (b) 33,334 (3) *
--------------------------- ----------------------- ----------------------------
Samuel Z. Herskowitz (b) 42,500 (4) *
--------------------------- ----------------------- ----------------------------
Dr. Nicholas Shashati (b) 73,334 (5) *
--------------------------- ----------------------- ----------------------------
Dr. Alan Cohen (a) 1,589,490 (6) 5.2%
--------------------------- ----------------------- ----------------------------
Dr. Robert Cohen (a) 1,389,490 (7) 4.5%
--------------------------- ----------------------- ----------------------------
Benito R. Fernandez (a) 6,301,075 (8) 21.1%
--------------------------- ----------------------- ----------------------------
Joel L. Gold (a) 121,500 (9) *
--------------------------- ----------------------- ----------------------------
All current directors and
executive officers as a
group (d) 9,812,223 (10) 31.1%
--------------------------- ----------------------- ----------------------------
______________________
* less than 1%
(a) Director
(b) Executive officer
(c) Former director and executive officer
(d) Includes all individuals listed in the table above with the exception
of Robert S. Hillman.
(1) This number excludes the right to acquire 500,000 shares of Common
Stock pursuant to options previously granted to Mr. Hillman, each of which were
cancelled as a result of Mr. Hillman's resignation from the Company on May 30,
2002.
(2) This number includes the right to acquire 50,000 shares of Common Stock
upon the exercise of presently exercisable, outstanding options.
(3) This number represents the right to acquire 33,334 shares of Common
Stock upon the exercise of presently exercisable, outstanding options, but
excludes an additional 16,666 options which are subject to certain vesting
requirements.
(4) This number represents the right to acquire 42,500 shares of Common
Stock upon the exercise of presently exercisable, outstanding options, but
excludes an additional 25,000 options which are subject to certain vesting
requirements.
(5) This number represents the right to acquire 73,334 shares of Common
Stock upon the exercise of presently exercisable, outstanding options, but
excludes an additional 66,666 options which are subject to certain vesting
requirements.
Page -53-
(6) This number includes the right to acquire 650,000 shares of Common
Stock upon the exercise of presently exercisable, outstanding options, but
excludes an additional: (i) 100,000 shares owned by Meryl Cohen, as custodian
for each of Erica and Nicole Cohen, the children of Alan and Meryl Cohen, to
which Dr. Cohen disclaims beneficial ownership; and (ii) 10,000 shares owned by
Dr. Cohen, as custodian for each of Erica and Nicole Cohen, to which Dr. Cohen
also disclaims beneficial ownership.
(7) This number includes the right to acquire 650,000 shares of Common
Stock upon the exercise of presently exercisable, outstanding options.
(8) This number represents shares of Common Stock owned by Horizons
Investors Corp. ("Horizons"), a New York corporation principally owned by Mr.
Fernandez.
(9) This number includes 1,500 shares of Common Stock owned by Mr. Gold's
children and the right to acquire 120,000 shares of Common Stock upon the
exercise of presently exercisable, outstanding options, but excludes an
additional 5,000 shares of Common Stock owned by Mr. Gold's wife, to which Mr.
Gold disclaims beneficial ownership.
(10) This number includes: (1) the right to acquire 1,619,168 shares of
Common Stock upon the exercise of presently exercisable, outstanding options. In
accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, as
amended, the 1,619,168 shares of Common Stock for which the Company's directors
and executive officers, as a group, hold currently exercisable options, have
been added to the total number of issued and outstanding shares of Common Stock
solely for the purpose of calculating the percentage of such total number of
issued and outstanding shares of Common Stock beneficially owned by such
directors and executive officers as a group.
SENIOR CONVERTIBLE PREFERRED STOCK:
Set forth below is the name, address, stock ownership and voting power of
each person or group of persons known by the Company to beneficially own more
than 5% of the outstanding shares of EVI's Senior Convertible Preferred Stock:
---------------------------------------------------------
Beneficial Percent of
Name Ownership Class
---------------------------------------------------------
Rita Folger
1257 East 24th Street
Brooklyn, NY 11210 0.74 (1) 100%
---------------------------------------------------------
(1) These shares are convertible into an aggregate of 98,519 shares of
Common Stock; and the holder thereof will be entitled to cast that number of
votes at any meeting of shareholders.
Page -54-
Item 13. Certain Relationships and Related Transactions
-------------------------------------------------------
Cohen's Fashion Optical
Drs. Robert and Alan Cohen are officers and directors of Cohen Fashion
Optical, Inc. ("CFO"), including its affiliate, Real Optical, LLC. ("REAL").
CFO, which has been in existence since 1978, owns a chain of company-operated
and franchised retail optical stores doing business under the name "Cohen's
Fashion Optical." As of March 24, 2003, CFO had 72 franchised stores and 15
company-owned stores (including one store operated by an affiliate of CFO under
the name "Cohen's Optical"). In addition, CFO also licenses to retail optical
stores the right to operate under the name "Cohen's Kids Optical" or "Ultimate
Spectacle." As of March 24, 2003, there were two Ultimate Spectacle stores
located in the State of New York; and REAL, as of such date, operated three
stores (under the name "Cohen's Fashion Optical"), all of which were located in
New York State. CFO and REAL stores are similar to the Company's retail optical
stores. CFO has been offering franchises since 1979 and currently has retail
optical stores in the States of Connecticut, Florida, New Hampshire,
Massachusetts, New Jersey and New York. In the future, Cohen's Fashion Optical,
Cohen's Kids Optical or Ultimate Spectacle stores may be located in additional
states. As of March 24, 2003, approximately 15 CFO stores were located in the
same shopping center or mall as, or in close proximity to, certain of the
Company's retail optical stores. It is possible that one or more additional
Cohen's Fashion Optical stores, Cohen's Kids Optical stores or Ultimate
Spectacle stores may, in the future, be located near one or more of the
Company's retail optical stores, thereby competing directly with such Company
stores. In addition, the Company's stores and certain of CFO's stores jointly
participate, as providers, under certain third party benefit plans obtained by
either the Company or CFO, which arrangement is anticipated to continue in the
future.
In January 2002, the Company subleased from CFO, for a term of five years,
a portion of the space then being leased by CFO in a building located at 100
Quentin Roosevelt Boulevard, Garden City, New York and, in connection therewith,
relocated its principal executive offices to such premises. Occupancy costs are
being allocated between the Company and CFO based upon the respective square
footages being occupied. The Company believes that its rent with respect to such
premises is equal to the fair market rental value of such space.
On December 31, 2002, the Company refinanced certain past due amounts, owed
to CFO, in an effort to improve its current cash flow position. As a result, the
Company signed a 5-year, $200,000 promissory note, in favor of CFO, bearing
interest at a rate of 10% per annum. The first monthly payment on the note was
due on March 1, 2003.
During the ordinary course of business, largely due to the fact that the
entities occupy office space in the same building, and in an effort to obtain
savings with respect to certain administrative costs, the Company and CFO will
at times share in the costs of minor expenses. Management believes that these
expenses have been appropriately accounted for by herein.
General Vision Services
In January 2001, General Vision Services, LLC ("GVS"), a Delaware limited
liability company located in New York City and beneficially owned, in principal
part, by Drs. Robert and Alan Cohen and certain members of their respective
immediate families (collectively, the "Cohen Family"), acquired substantially
all of the assets of General Vision Services, Inc. As of March 24, 2003, GVS
operated approximately 24 retail optical stores located in the New York
metropolitan area, which stores are similar to the retail optical stores
operated and franchised by the Company. In addition, GVS solicits and
administers third party benefit programs similar to those being administered by
the Company. It is possible that a GVS store, or another retail optical store
which provides third party benefit plans administered by GVS, may now or in the
future be located near one or more of the Company's retail optical stores and
may be competing directly with such store.
Furthermore, the Company, CFO and GVS jointly participate in certain third
party benefit plans, and certain of the Company's retail optical stores, CFO's
stores and GVS' stores participate as providers under third party benefit plans
obtained by either the Company, CFO or GVS and, in all likelihood, will continue
to do so in the future.
In June 2001, the Company subleased to GVS its retail optical store (and
the furniture, fixtures and equipment located therein), located in Nyack, New
York, at a rent per month equal to the rent and additional rent payable under
the Master Lease for such store, less a monthly rental credit, until May 31,
2003, of $2,500. Pursuant to the terms of such sublease, the Company will be
required to transfer and convey to GVS all of such store's furniture, fixtures
and equipment from and after June 15, 2003, provided GVS is not then in default
in performing its obligations under such sublease.
Further, in April 2002, EVI sold to GVS, for the sum of $55,000,
substantially all of the assets of one of its stores located in New York City,
together with all of the capital stock of its wholly-owned subsidiary, Sterling
Vision of 125th Street, Inc., which is the tenant under the Master Lease for
such store.
Page -55-
During 2002, the Company purchased from City Lens, Inc. ("City Lens"), an
ophthalmic lens laboratory owned by GVS, ophthalmic lenses and certain lens
refinishing services for its Company-owned stores. For the years ended December
31, 2002, the total cost of such lenses and services purchased from City Lens
was approximately $228,000. The Company believes that the cost of such lenses
and services were as favorable to the Company as those which could have been
obtained from an unrelated third party.
Additional Agreements and Transactions Between the Company and the Cohen Family
On December 6, 2001, the Company borrowed from Broadway Partners, LLC
("Broadway"), a New York partnership owned by certain of Dr. Robert and Alan
Cohen's children, the sum of $300,000, which loan, together with interest
thereon, calculated at 1% above the prime rate of interest, was repaid to
Broadway, in full, on January 23, 2002.
On July 23, 2002, the Board authorized the Company to borrow $300,000 from
Dr. Robert Cohen. The loan was payable on August 10, 2002, together with
interest in an amount equal to 1% of the principal amount of such loan. The
Company repaid this loan, in full, on August 8, 2002.
Horizons Investors Corp. and Matters Relating to Benito R. Fernandez
On December 3, 2001 and December 20, 2001, the Company borrowed from
Horizons the sums of $150,000 and $300,000, respectively, each of which loans,
together with interest thereon, calculated at 1% above the prime rate, were
repaid by the Company, in full, on January 23, 2002.
On January 23, 2002, the Company and Horizons entered into a series of
agreements pursuant to which Horizons established, in favor of the Company, a
credit facility, in the maximum amount of $1,000,000 and, in connection
therewith, the Company obtained from Horizons an initial advance thereunder, in
the amount of $300,000. Loans under such credit facility, which bear interest at
the rate of 1% above the prime rate and must be in increments of at least
$150,000, are secured by a pledge, to Horizons, of a substantial portion of the
Company's franchise notes receivable, and must be fully amortized (repaid) over
the then remaining term of the facility, which will expire on January 23, 2004.
In addition, pursuant to the terms of such agreements with Horizons, the Company
is required to pay, to Horizons, a facility fee equal to 2% per annum of the
average daily principal balance of the unused portion of the facility from time
to time outstanding.
EVI is also required to pay, to Horizons, an interest rate differential fee
equal to the difference between the rate of interest actually paid, by the
Company, to North Fork Bank on its $1,000,000 term loan from such Bank (which
loan was secured by Horizon's pledge, to the Bank, of a $1,000,000 certificate
of deposit) and 1% above the prime rate.
In connection with the above financing arrangements, EVI issued, to
Horizons, five-year warrants to purchase up to 2,500,000 shares of EVI's Common
Stock at an exercise price of $0.01 per share. Horizons exercised 2,000,000,
250,000 and 250,000 of such warrants on May 1, 2002, July 22, 2002 and October
22, 2002, respectively.
Page -56-
Item 14. Controls and Procedures
---------------------------------
a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of the Company's disclosure controls and
procedures as of a date within 90 days of the filing of this Report, the
Co-Chief Operating Officers (one of which is also the Company's Chief Financial
Officer) have concluded that such controls and procedures are effective.
b) Changes in Internal Controls
There were no significant changes in the Company's internal controls, or in
other factors, that could significantly affect such controls subsequent to the
date of their evaluation.
Page -57-
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
-------------------------------------------------------------------------
(a) The following documents are filed as a part of this Report:
1. Financial Statements.
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity (Deficit) for the
Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
All financial statement schedules have been omitted because they are not
applicable, are not required, or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
EXHIBIT INDEX
Exhibit
Number
-------
3.1 Restated Certificate of Incorporation of Sterling Vision, Inc., filed
on December 20, 1995 (incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1995)
3.2 Amended and Restated By-Laws of Sterling Vision, Inc., dated December
18, 1995 (incorporated by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1995)
3.3 * Certificate of Amendment of the Certificate of Incorporation of
Sterling Vision, Inc., filed on January 26, 2000
3.4 Form of Certificate of Amendment of the Certificate of Incorporation of
Sterling Vision, Inc., filed on February 8, 2000 (incorporated by reference to
Exhibit 10.94 to the Company's Current Report on Form 8-K, dated February 8,
2000)
3.5 Form of Certificate of Amendment of the Certificate of Incorporation of
Sterling Vision, Inc., filed on February 10, 2000 (incorporated by reference to
Exhibit 10.96 to the Company's Current Report on Form 8-K, dated February 8,
2000)
3.6 * Certificate of Amendment of the Certificate of Incorporation of
Sterling Vision, Inc., filed on April 17, 2000
3.7 * Certificate of Amendment of the Certificate of Incorporation of
Emerging Vision, Inc., filed on July 15, 2002
4.1 Specimen of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement No. 33-98368)
4.2 Form of Warrant, dated December 16, 1999, issued to MY2000, LLC
(incorporated by reference to Exhibit 10.93 to the Company's Current Report on
Form 8-K/A, dated December 16, 1999)
Page -58-
4.3 Form of Warrant issued to Purchasers in the Company's Private Placement
of Units consisting of Series B Convertible Preferred Stock and Warrants to
purchase Common Stock (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement No. 333-37160)
4.4 Form of Warrant issued to Placement Agents (and/or their respective
designees) in connection with the Company's Private Placement (incorporated by
reference to Exhibit 4.3 to the Company's Registration Statement No. 333-37160)
4.5 Warrant Certificate and Agreement, dated as of January 16, 2001,
between Emerging Vision, Inc. and Goldin Associates, LLC (incorporated by
reference to Exhibit 10.117 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001)
4.6 Warrant Certificate and Agreement, dated as of April 26, 2001, between
Emerging Vision, Inc. and Balfour Investors Incorporated (incorporated by
reference to Exhibit 10.118 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001)
4.7 Form of Warrant issued to Subscribers in connection with the Company's
Rights Offering (incorporated by reference to Exhibit 4.5 to the Company's
Registration Statement No. 333-100697)
10.1 Sterling Vision, Inc.'s 1995 Stock Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement No. 33-98368)
10.2 Form of Sterling Vision, Inc.'s Franchise Agreement (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement No. 33-98368)
10.3 Form of Franchisee Stockholder Agreement to be entered into between
Sterling Vision, Inc. and certain of its Franchisees (incorporated by reference
to Exhibit 10.47 to the Company's Registration Statement No. 33-98368)
10.4 First Amendment to Sterling Vision, Inc.'s 1995 Stock Incentive Plan
(incorporated by reference to Exhibit 10.63 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996, File No. 1-14128)
10.5 Exchange Agreement, dated April 14, 1998, between the Company and the
Original Holders of the Registrant's Convertible Debentures Due February 17,
1999 (incorporated by reference to Exhibit 10.78 to the Company's Current Form
on 8-K, dated April 14, 1998
10.6 First Amendment to Convertible Preferred Stock and Warrants
Subscription Agreement, dated January 4, 1999 (incorporated by reference to
Exhibit 10.78 to the Company's Current Report on Form 8-K, dated January 4,
1999)
10.7 Second Amendment to Convertible Preferred Stock and Warrants
Subscription Agreement, dated March 4, 1999 (incorporated by reference to
Exhibit 10.79 to the Company's Current Report on Form 8-K, dated March 4, 1999)
10.8 Third Amendment to Convertible Preferred Stock and Warrants
Subscription Agreement, dated December 7, 1999 (incorporated by reference to
Exhibit 10.90 to the Company's Current Report on Form 8-K, dated December 7,
1999)
10.9 Form of Settlement Agreement, dated as of April 24, 2001, between
Emerging Vision, Inc. and Sara V. Traberman (incorporated by reference to
Exhibit 10.113 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001)
10.10 Asset Purchase Agreement, dated as of May 31, 2001, by and among
Insight Laser Centers N.Y.I, Inc., Insight Amsurg Centers, Inc., Emerging
Vision, Inc. and Amsurg Acquisition Corp. (incorporated by reference to Exhibit
10.114 to the Company's Current Report on Form 8-K, dated June 13, 2001)
10.11 Employment Agreement, effective as of July 2, 2001, between Emerging
Vision, Inc. and Robert S. Hillman (incorporated by reference to Exhibit 10.115
to the Company's Current Report on Form 8-K, dated July 2, 2001)
10.12 Settlement Agreement and Mutual Release, dated as of July 5, 2001,
between Emerging Vision, Inc. and Rare Medium Group, Inc. and Rare Medium Inc.
(incorporated by reference to Exhibit 10.116 to the Company's Current Report on
Form 8-K, dated July 2, 2001)
Page -59-
10.13 Form of Term Note, dated January 23, 2002, executed by the Company in
favor of North Fork Bank (incorporated by reference to Exhibit 10.119 to the
Company's Current Report on Form 8-K, dated January 23, 2002)
10.14 Form of Loan Agreement and Exhibits, dated January 23, 2002, between
Emerging Vision, Inc. and Horizon Investors Corp. (incorporated by reference to
Exhibit 10.120 to the Company's Current Report on Form 8-K, dated January 23,
2002)
10.15 Form of Settlement Agreement and General Release, dated as of April
1, 2002, between Emerging Vision, Inc. and each of V.C. Enterprises, Inc.,
Bridget Licht, Sitescope, Inc., Eyemagination Eyeworks, Inc. and Susan Assael,
including the form of Area Representation Agreement annexed thereto as an
Exhibit (incorporated by reference to Exhibit 10.37 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001)
10.16 Warrant Agreement, dated February 10, 2003, by and between Emerging
Vision, Inc. and Mellon Investor Services LLC (incorporated by reference to
Exhibit 10.38 to the Company's Registration Statement No. 333-100697)
10.17 * Employment Agreement, effective as of February 11, 2002, between
Emerging Vision, Inc. and Christopher G. Payan
21.1 * List of Subsidiaries
23.1 * Consent of Independent Public Accountants
99.1 * Certifications of Principal Executive Officers and Principal
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Exhibit being filed herewith
b) Reports on Form 8-K
1. On October 23, 2002, the Company filed a Report on Form 8-K regarding
the issuance of a press release, on February 23, 2002, announcing its
shareholder rights offering.
2. On February 11, 2003, the Company filed a Report on Form 8-K regarding
the issuance of a press release, on February 10, 2003, regarding the
announcement of the final terms of its shareholder rights offering.
Page -60-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EMERGING VISION, INC.
By: /s/ Christopher G. Payan
------------------------------
Christopher G. Payan
Senior Vice President,
Co-Chief Operating Officer and
Chief Financial Officer
Date: March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Christopher G. Payan Senior Vice President, Co-Chief Operating March 28, 2003
--------------------------- Officer and Chief Financial Officer
Christopher G. Payan (Co-Principal Executive Officer and
Principal Financial Officer)
/s/ Samuel Z. Herskowitz Co-Chief Operating Officer and March 28, 2003
--------------------------- Chief Marketing Officer
Samuel Z. Herskowitz (Co-Principal Executive Officer)
/s/ Myles S. Lewis Co-Chief Operating Officer and March 28, 2003
--------------------------- Senior Vice President - Business Development
Myles S. Lewis (Co-Principal Executive Officer)
/s/ Brian P. Alessi Corporate Controller March 28, 2003
--------------------------- (Principal Accounting Officer)
Brian P. Alessi
/s/ Dr. Alan Cohen Chairman of the Board of Directors March 28, 2003
---------------------------
Dr. Alan Cohen
/s/ Dr. Robert Cohen Director March 28, 2003
---------------------------
Dr. Robert Cohen
/s/ Benito R. Fernandez Director March 28, 2003
---------------------------
Benito R. Fernandez
/s/ Joel L. Gold Director March 28, 2003
---------------------------
Joel L. Gold
Page -61-
I, Christopher G. Payan, certify that:
1. I have reviewed this annual report on Form 10-K of Emerging Vision,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report ( the "Evaluation Date"); and
c) presented in this annual report our conclusion about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Christopher G. Payan
--------------------------------
Christopher G. Payan
Co-Chief Operating Officer and
Chief Financial Officer
Page -62-
I, Myles S. Lewis, certify that:
1. I have reviewed this annual report on Form 10-K of Emerging Vision,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report ( the "Evaluation Date"); and
c) presented in this annual report our conclusion about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Myles S. Lewis
-------------------------------
Myles S. Lewis
Co-Chief Operating Officer
Page -63-
I, Samuel Z. Herskowitz, certify that:
1. I have reviewed this annual report on Form 10-K of Emerging Vision,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report ( the "Evaluation Date"); and
c) presented in this annual report our conclusion about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Samuel Z. Herskowitz
---------------------------------
Samuel Z. Herskowitz
Co-Chief Operating Officer
Page -64-
Exhibit 3.3
CERTIFICATE OF AMENDMENT OF THE
CERTIFICATE OF INCORPORATION
OF STERLING VISION, INC.
Under Section 805 of the Business Corporation Law
-------------------------------------------------
FIRST: The name of the corporation is Sterling Vision, Inc. (the
"Company"), and the Company was formed under the name Sterling Acquisition, Inc.
SECOND: The Certificate of Incorporation of the Company was filed with the
Department of State of the State of New York on January 15, 1992.
THIRD: The Certificate of Incorporation of the Company is hereby amended to
amend and restate certain of the terms and provisions of the series of the
Company's Preferred Stock, par value $.01 per share, previously designated as
Senior Convertible Preferred Stock and created by the Company's Certificate of
Amendment to its Certificate of Incorporation filed with the New York State
Department of State on April 15, 1998, which was previously created pursuant to
Article 4 of the Certificate of Incorporation of the Company; and Article 4
shall be further amended to restate, in its entirety, the terms and provisions
of the Senior Convertible Stock previously created by the Company, as follows:
Article 1. Designation, Issuance, Rank, Dividends and Redemption/Resale.
-------------------------------------------------------------
Section 1.1 Designation, Issuance and Rank. The designation of the series
of Preferred Stock authorized by this Resolution shall be "Senior Convertible
Preferred Stock" (the "Convertible Preferred Stock" or the "Security"). The
maximum number of shares of Convertible Preferred Stock issuable hereunder shall
be thirty-five (35), which shares may be issued from time to time. Subject to
compliance with applicable protective voting rights which have been or may be
granted to the Preferred Stock of the Company or any series thereof in
Certificates of Designation or in the Company's Certificate of Incorporation, as
amended and as hereafter may be amended ("Protective Provisions"), but
notwithstanding any other rights of the Preferred Stock of the Company or any
series thereof, the rights and preferences of the Convertible Preferred Stock
shall rank pari passu with (including, without limitation, inclusion in
provisions with respect to liquidation and acquisition preferences, redemption
and/or approval of matters by vote or written consent), or senior to any present
or future class or series of Preferred Stock or common stock of the Company.
Subject to compliance with applicable Protective Provisions, the Board of
Directors is also authorized to decrease the number of shares of Convertible
Preferred Stock, prior or subsequent to the issue of that series, but not below
the number of shares of the Convertible Preferred Stock then outstanding. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series. The rights, preferences, privileges and restrictions granted to, and
imposed on, the Convertible Preferred Stock are set forth below in this Article
1.
Section 1.2 Payment of Dividends.
---------------------
(a) The holder of the Convertible Preferred Stock or their registered
assigns (each a "Holder") shall be entitled to receive dividends on the "Stated
Value" of each share of Convertible Preferred Stock through and including
February 17, 1999, only, whether or not such dividends are declared by the Board
of Directors. Dividends shall accrue from February 17, 1998 notwithstanding that
the Convertible Preferred Stock was issued after such date, and shall be payable
through and including February 17, 1999, only (including, but not limited to,
all accrued and unpaid dividends on such portion, if any, of the Stated Value of
the Convertible Preferred Stock as may have been previously converted or
redeemed pursuant to the provisions hereof) subject to the provisions of
Subsection 1.2(d) below, in United States Dollars, quarter-annually, in arrears,
on the 17th day of each of May, August and November, 1998 and February, 1999,
commencing May 17, 1998 (each a "dividend payment date").
(b) The "Stated Value" of each share of Convertible Preferred Stock
(regardless of its par value), shall be One Hundred Thousand ($100,000) Dollars,
which shall be increased or decreased proportionately for any stock
consolidation or stock split, respectively, of the outstanding shares of
Convertible Preferred Stock.
(c) Dividends on the Convertible Preferred Stock shall be equal to the sum
of: (i) ten (10% percent of the Stated Value of such share; plus (ii) ten (10%)
percent of the Unpaid Dividend Amount (as defined below) as of the previous
dividend accrual date. The Unpaid Dividend Amount with respect to each share of
Convertible Preferred Stock shall be equal to the aggregate of all dividends
that the Holder of such share shall have become entitled to receive for such
share, but that shall not have been paid by the Company for any reason
whatsoever. Nothing in this Section shall limit any other rights or remedies of
the Holder on account of the Company's failure to pay any dividends hereunder.
(d) Notwithstanding the provisions of Subsection 1(a) above, the Company
shall have the right, in its sole and absolute discretion, to pay any dividends
then due on the Convertible Preferred Stock in shares of its Common Stock, par
value $.01 per share (the "Common Stock") which may then be resold pursuant to
the Registration Statement (as hereinafter defined) based upon a price per share
equal to the average closing price of the Company's Common Stock (as reported on
-2-
the Nasdaq National Market System or the Nasdaq Small Cap Market) for the five
(5) trading days immediately preceding the date on which any such dividend
became due.
(e) In the event the Registration Statement (referred to in Article 4 of
the Agreement, as said term is hereinafter defined) is not declared effective
within one hundred fifty (150) days after the Closing (as defined in the
Agreement), the Security, or any portion thereof outstanding on and after such
date, shall thereafter accrue dividends (until the date that such Registration
Statement shall be declared effective) at a rate per annum equal to eighteen
(18%) percent. Such dividends shall: (i) include (but not be limited to) all
accrued and unpaid dividends on such portion, if any, of the Stated Value of
this Security as may have been previously converted pursuant to the provisions
hereof; and (ii) be due and payable on each dividend payment date.
Section 1.3 Intentionally Deleted.
----------------------
Article 2. Liquidation Preference.
-----------------------
Section 2.1 In the event of any liquidation, dissolution or winding up of
the Company, either voluntary or involuntary, the Holders of the Convertible
Preferred Stock shall be entitled to receive, prior or in preference to any
payment or distribution and setting apart (for payment or distribution) any of
the assets or surplus funds of the Company to the holders of the Common Stock
and/or to the holders of any other equity securities, an amount (the
"Liquidation Amount") for each share of Convertible Preferred Stock then held by
them, the sum of $100,000, plus any declared but unpaid dividends on the
Convertible Preferred Stock. If, upon the occurrence of such event, the assets
and funds thus distributed among the Holders of the entire, aggregate
Liquidation Amounts payable to the Holders of Convertible Preferred Stock
pursuant to this Section 2.1, then the entire assets and funds of the Company
legally available for distribution shall be distributed among the Holders of the
Convertible Preferred Stock pro rata on the basis of the number of shares of
Convertible Preferred Stock then held by each of them.
Section 2.2 All payments for which this Article 2 provides shall be in
cash, property (valued at its fair market value, as determined by an
independent, nationally recognized investment banking firm) or a combination
thereof. After payment of the full amount of the Liquidation Amount to which
each Holder is entitled, such Holders of shares of Convertible Preferred Stock
will not be entitled to any further participation in any distribution of the
assets of the Company.
Article 3. Conversion.
-----------
Section 3.1 Conversion Privilege.
---------------------
(a) Subject to the terms and conditions of the Security, the Holder of the
Security shall have the right, prior to redemption by the Company, exercisable
at one or more times, at its option, to convert all or a portion of the Security
into the Common Stock of the Company at the times hereafter specified. The
number of shares of Common Stock issuable upon the conversion of the Security
-3-
shall be determined by dividing the Stated Value of the shares of Convertible
Preferred Stock to be converted, by the Conversion Price in effect on the
conversion date, and rounding the result to the nearest 1/100th of a share. The
effectiveness of said Registration Statement shall not be condition precedent to
any such conversion. The "Conversion Price" for each conversion shall be: (i)
Four ($4.00) dollars with respect to all Securities converted on or prior to
February 10, 1999; and (ii) Seventy-Five Cents ($0.75) with respect to all
Securities converted from and after February 10, 1999.
(b) Notwithstanding anything contained herein to the contrary, the Security
shall not be convertible by a Holder to the extent that, and so long as, the
Common Stock which would be acquired upon such conversion, when aggregated with
any other shares of Common Stock at the time of conversion beneficially owned by
such Holder and not theretofore sold by the Holder, would aggregate more than
4.9% of the then outstanding shares of Common Stock of the Company. For this
purpose, "beneficial ownership" shall be calculated in accordance with the
provisions of Section 13(d) of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder. The opinion of the
Holder's counsel shall be conclusive in calculating the Holder's beneficial
ownership.
Section 3.2 Conversion Procedure.
---------------------
(a) To convert the Security into Common Stock, the Holder must: (i)
complete, sign and deliver to the Company the Notice of Conversion attached
hereto, together with an affidavit that it is the then Holder of the Security.
Except as otherwise provided herein, the date upon which the Company receives
the completed Notice of Conversion (by recognized, overnight courier,
hand-delivery or facsimile, followed by hand-delivery or courier delivery within
two (2) business days thereafter) is the conversion date. Within seven (7)
business days after its receipt of the Notice of Conversion, as aforesaid, the
Company shall deliver a certificate for the number of full shares of Common
Stock issuable upon such conversion, and a check for any fraction of a share.
The person in whose name the certificate representing shares of Common Stock is
to be registered shall be treated as a shareholder of record on and after the
conversion date. Upon surrender of a Security that is to be converted in part,
the Company shall issue to the Holder a new Security, equal in number to the
unconverted portion of the Security surrendered.
(b) Notwithstanding the provisions of Subsection 3.2(a) above, from and
after the date that the Registration Statement (referred to in Article 4 of the
Agreement) shall become and thereafter remain effective, the Company, if so
requested by the Holder, shall, within three (3) business days after its receipt
of the Notice of Conversion (as required pursuant to Subsection 3.2(a) above),
whether or not the Company has then received the original of such Convertible
Preferred Stock from the Holder, serve written instructions on its transfer
agent to "DWAC" the shares of Common Stock to be issued upon any such conversion
of the Security, it being understood that no further documentation shall be
required of a Holder in connection therewith.
-4-
Section 3.3 Fractional Shares. The Company shall not issue a fractional
share of Common Stock upon the conversion of all or any portion of the Security.
Instead, the Company shall pay, in lieu of any fractional share, the cash value
thereof at the Conversion Price of the Common Stock as determined pursuant to
Section 3.1 above.
Section 3.4 Taxes on Conversion. The Company shall pay any documentary,
stamp or similar issue or transfer tax due on the issuance of Common Stock upon
the conversion of the Security. The Holder, however, shall pay any such tax
which is due because such shares are issued in a name other than its name.
Section 3.5 Company to Reserve Stock. The Company shall reserve out of its
authorized but unissued Common Stock for issuance as herein provided, a number
of shares of Common Stock into which the Security may be converted. All shares
of Common Stock which may be issued upon the conversion of the Security shall be
fully paid and nonassessable.
Section 3.6 Restrictions on Transfer. The Security and the Common Stock
issuable upon the conversion thereof will not have been registered under the
Securities Act of 1933, as amended (the "Act") and will be sold pursuant to an
exemption under the Act. The Security, and each certificate evidencing the
Security, may not be pledged, transferred or resold except pursuant to
registration under, or an exemption from, the Act. Each certificate representing
shares of Convertible Preferred Stock, and each certificate representing any
shares of Common Stock issued thereunder, shall bear a restrictive legend
similar to the legend set forth below:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES
LAW, AND SUCH SECURITIES MAY NOT BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR
OTHERWISE TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER
OF SUCH SECURITEIS, WHICH COUNSEL AND OPINION ARE REASONBLY SATISFACTORY TO THE
COMPANY, THAT SUCH SECURITIES MAY BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS.
Article 4. Recapitalization, Mergers, etc.
-------------------------------
Section 4.1 Recapitalization Generally. In case the Company, prior to
February 17, 2000, shall: (i) subdivide its outstanding Common Stock (including
by means of a dividend or distribution on the Common Stock payable in Common
Stock); (ii) combine its outstanding Common Stock into a smaller number of
-5-
shares; or (iii) issue, by capital reorganization or reclassification of its
Common Stock (other than a subdivision or combination of its shares as provided
for above, a reorganization, merger, consolidation or sale of assets provided
for elsewhere in this Article 4, or the issuance of any shares of Common Stock
in connection with the acquisition of assets or the repayment of debt) the
Conversion Price in effect thereafter shall be adjusted so that it shall be
adjusted to reflect such action. An adjustment made pursuant to this subsection
shall become effective, retroactively, immediately after the effective date in
the case of a subdivision, combination or reclassification.
Section 4.2 Mergers. Until the Security is redeemed or has been converted
into Common Stock, the Company shall not consolidate or merge into, or transfer
all or substantially all of its assets to, any person, unless the terms of such
consolidation, merger of transfer include the preservation of the Convertible
Preferred Stock. Any reference herein to the Company shall refer to such
surviving or transferee corporation. If the Company merges or consolidates with
another corporation, or sells or transfers all or substantially all of its
assets to another person, and the holders of the Common Stock are entitled to
receive stock, securities or property in respect of, or in exchange for, Common
Stock, then, as a condition of such merger, consolidation, sale or transfer, the
Company and any such successor, purchaser or transferee shall amend the Security
to provide that it may thereafter be converted on the terms and subject to the
conditions set forth above into the stock, securities or property receivable
upon such merger, consolidation, sale or transfer by a holder of shares of
Common Stock into which the Security might have been converted immediately
before such merger, consolidation, sale or transfer, entity in such merger,
consolidation, sale or transfer. In any such case, appropriate adjustment shall
be made in the application of the provisions of this Article 4 with respect to
the rights of a Holder upon and after such merger, consolidation, sale or
transfer to the end that the provisions of this Article 4 (including adjustment
of the Conversion price then in effect and the number of shares of Common Stock
issuable upon conversion of the Security) shall be applicable after that event
as nearly equivalently as may be practicable. Except as otherwise provided
herein, the Conversion Price shall be the same as the applicable Conversion
Price set forth in Subsection 3.l(b) above, as the same is to be adjusted
pursuant to Subsection 4.1 above.
Article 5. Failure to Perform.
-------------------
Section 5.1 Failure to Perform Certain Covenants. In the event the Company
breaches its obligation to deliver certificates for Common Stock pursuant to
Section 3.2 above, the Company shall be required to make payment to the Holder
of the Security, within five (5) business days after each demand by the Holder,
of an amount equal to One Thousand ($1,000) Dollars per day with respect to each
One Hundred Thousand ($100,000) Dollars (or the pro rata portion thereof) Stated
Value of the Security outstanding during such period as such breach continues.
Section 5.2 Rights and Remedies. The rights and remedies provided to a
Holder under Section 5.1 and 5.2 above shall not limit any other rights and
remedies afforded by law to a Holder.
-6-
Article 6. Reports. The Company will mail to each Holder of the Security,
at its address as shown on the Register (as defined in Section 8.2 below) a copy
of any annual, quarterly or current report that it files with the Securities and
Exchange Commission promptly after the filing thereof, and a copy of any annual,
quarterly or other report or proxy statement that it gives to its shareholders
generally, at the time such report or statement is sent to shareholders.
Article 7. Registered Securities.
----------------------
Section 7.1 Series. The Securities to be issued hereunder shall be one of a
numbered series of Securities issued to the Holders and designated as "Senior
Convertible Preferred Stock." Such Securities are collectively referred to
herein as the "Securities."
Section 7.2 Record Ownership. The Company shall maintain a register of the
Holders of the Securities (the "Register") showing their names and addresses and
the serial numbers and the Stated Value of Securities issued to, or transferred
of record by, them from time to time. The Register may be maintained in
electronic, magnetic or other form. The Company may treat the person named as
the Holder of a Security in the Register as the sole owner of such Security. The
Holder of the Security shall be the person exclusively entitled to receive
notifications with respect to such Security, convert it into Common Stock and
otherwise exercise all of the rights and powers as the absolute owner thereof.
Section 7.3 Registration of Transfer. Transfers of the Security may be
registered on the books of the Company maintained for such purpose pursuant to
Section 7.2 above (i.e., the Register). Transfers shall be registered when the
Security is presented to the Company with a request to register the transfer
thereof and the Security is duly endorsed by the Holder, reasonable assurances
are given that the endorsements are genuine and effective, the Company has
received a certificate from the Holder that it owns the Security free and clear
of all claims, liens and/or encumbrances, and the Company has received evidence,
satisfactory to it, that such transfer is rightful and in compliance with all
applicable laws, including tax laws and State and Federal securities laws. When
the Security is presented for transfer and duly transferred hereunder, it shall
be canceled and one or more new Securities showing the name(s) of the
transferee(s) as the Holder(s) thereof shall be issued in lieu thereof. When the
Security is presented to the Company with a reasonable request to exchange it
for an equal Stated Value of Securities of other denominations, the Company
shall make such exchange and shall cancel the Security and issue, in lieu
thereof, Securities having a total Stated Value equal to the Stated Value of the
Security, in the denominations requested by the Holder.
Section 7.4 Worn and Lost Securities. If the Security becomes worn, defaced
or mutilated but is still substantially intact and recognizable, the Company or
its agent may issue a new Security in lieu thereof upon its surrender. Where the
Holder of a Security claims that such Security has been lost, destroyed or
wrongfully taken, the Company shall issue a new Security in place of the
original Security if the Holder so requests by written notice to the Company
(provided such notice is actually received by the Company before it is notified
that such Security has been acquired by a bona fide purchaser) and the Holder
has delivered to the Company an indemnity bond in such amount and issued by such
surety as the Company deems satisfactory, together with an affidavit of the
Holder setting forth the facts covering such loss, destruction or wrongful
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taking and such other information, in such form and with such proof or
verification, as the Company may request.
Article 8. Voting Rights. Except as specifically set forth in the Business
Corporation Act of the State of New York, the Holders of shares of Convertible
Preferred Stock shall not be entitled to any voting rights with respect to any
matters voted upon by shareholders of the Company.
Article 9. Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, registered first
class mail, overnight courier, or telecopied, initially to the address set forth
below, and thereafter at such other address, notice of which is given in
accordance with the provisions of this Article 9.
All notices to Holders are to be directed to each Holder at such address as
is listed for such Holder in the Register.
All notices to the Company are to be directed to:
Sterling Vision, Inc.
1500 Hempstead Turnpike
East Meadow, New York 11554
Attn: General Counsel
Telephone: (516) 390-2100
Telecopier: (516) 390-2150
with a copy (which shall not constitute notice) to:
Camhy, Karlinsky & Stein, LLP
1740 Broadway
16th Floor
New York, New York 10019
Attn: Robert S. Matlin, Esq.
Telephone: (212) 977-6600
Telecopier: (212) 977-8389
All such notices and communications shall be deemed to have been duly
given, when delivered by hand, if personally delivered; three (3) business days
after being deposited in the mail, postage prepaid, if mailed; the next business
day after being deposited with an overnight courier, if deposited with a
nationally recognized, overnight courier service; or when receipt is
acknowledged, if telecopied.
Article 10. Times. Where this Certificates authorizes or requires the
payment of money or the performance of a condition or obligations on a Saturday
or Sunday or a public holiday, or authorizes or requires the payment of money or
the performance of a condition or obligation within, before or after a period of
time computed from a certain date, and such period of time ends on a Saturday, a
Sunday or a public holiday, such payment may be made or condition or obligation
performed on the next succeeding business day, and if the period ends at a
specific hour, such payment may be made or condition performed, at or before the
-8-
same hour of such next succeeding business day, with the same force and effect
as if made or performed in accordance with the terms of this Certificate.
Article 11. Rules of Construction. Herein, unless the context otherwise
requires, words in the singular number include the plural, and in the plural
include the singular, and words of the masculine gender include the feminine and
the neuter, and when the sense so indicates, words of the neuter gender may
refer to any gender. The numbers and titles of Articles and Sections contained
herein are inserted for convenience of reference only, and they neither form a
part of this Certificate, a determination of the Company is required or allowed,
such determination shall be made by a majority of the Board of Directors of the
Company, and if it is made in good faith, it shall be conclusive and binding
upon the Company and the Holder of the Security.
FOURTH: Thirty-five (35) shares of the unissued Preferred Stock of the
Company, par value $0.1, have been designated Senior Convertible Preferred
Stock, the terms of which are stated above in Article THIRD hereof.
FIFTH: Pursuant to the authority under Article 4 of the Certificate of
Incorporation of the Company and Sections 502 and 805 of the Business
Corporation Law of the State of New York, the Board of Directors of the Company:
(i) by Unanimous Written Consent, dated April 9, 1998, adopted a Resolution
creating a series of Preferred Stock of the Company, designated Senior
Convertible Preferred Stock; and (ii) by Resolution adopted by its Board of
Directors on December 7, 1999, amended certain of the provisions of such
previously created series of Senior Convertible Preferred Stock, the terms of
which have been restated in Article THIRD hereof.
-9-
IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment to
the Certificate of Incorporation of the Company to be signed by the Chairman of
its Board of Directors and the Secretary of the Company, who affirm that the
statements made herein are true and correct under the penalties of perjury, on
this 20th day of January, 2000.
STERLING VISION, INC.
By: /s/ Dr. Robert Cohen
-------------------------
Name: Dr. Robert Cohen
Title: Chairman of the Board
By: /s/ Joseph Silver
-------------------------
Name: Joseph Silver
Title: Secretary
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Exhibit 3.6
CERTIFICATE OF AMENDMENT OF THE
CERTIFICATE OF INCORPORATION
OF STERLING VISION, INC.
Under Section 805 of the Business Corporation Law
of the State of New York
FIRST: The name of the corporation is Sterling Vision, Inc. (the
"Company"), and the Company was formed under the name Sterling Acquisition, Inc.
SECOND: The Certificate of Incorporation of the Company was filed with the
Department of State of the State of New York on January 15, 1992 under the
original name of Sterling Acquisition, Inc., which Certificate of Incorporation
was restated, in its entirety, on December 20, 1995.
THIRD: The Certificate of Incorporation of the Company, as amended (the
"Amended and Restated Certificate of Incorporation"), is hereby further amended
to change the name of the Company to Emerging Vision, Inc.; and Article 1 of the
Certificate of Incorporation of the Company is hereby restated, in its entirety,
to read as follows:
"FIRST: That the name of the corporation is Emerging Vision, Inc. (the
"Company") and that the Company was formed under the name Sterling Acquisition,
Inc., which was subsequently changed to Sterling Vision, Inc."
FOURTH: The Certificate of Incorporation of the Company is hereby further
amended to increase the authorized number of shares of the Company's Common
Stock, par value $.01 pr share, from 28,000,000 shares to 50,000,000 shares; and
the first paragraph of Article 4 of the Certificate of Incorporation of the
Company is hereby restated, in its entirety, to read as follows:
"FOURTH: The Company is authorized to issue two classes of shares of
capital stock, to be designated, respectively, as Preferred Stock and Common
Stock. The total number of shares of capital stock that the Company is
authorized to issue is 55,000,000. The total number of shares of Common Stock
which the Company shall have the authority to issue is 50,000,000 shares, par
value $.01 per share. The total number of shares of Preferred Stock which the
Company shall have the authority to issue is 5,000,000 shares, par value $.01
per share."
FIFTH: The foregoing amendments to the Company's Certificate of
Incorporation were authorized by: (i) the Unanimous Written Consent of the Board
of Directors of the Company, dated February 3, 2000; (ii) all of the Directors
of the Company at a Meeting of the Company's Board of Directors duly called and
held on March 30, 2000; in each case followed by (iii) the affirmative vote of
the holders of a majority of the votes entitled to be cast thereon by the
holders of the outstanding shares of the Company's capital stock at a Special
Meeting of Shareholders duly called and held on April 17, 2000.
IN WITNESS WHEREOF, the undersigned, President and Secretary of the
Company, have each executed this Amendment of the Company's Certificate of
Incorporation as of April 17, 2000, and each hereby affirms, under the penalties
of perjury, that the statements contained herein are true.
/s/ Alan Cohen
--------------------------
Alan Cohen, President
/s/ Joseph Silver
--------------------------
Joseph Silver, Secretary
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Exhibit 3.7
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
EMERGING VISION, INC.
Under Section 805 of the Business Corporation Law
FIRST: The name of the corporation is Emerging Vision, Inc. (the "Company")
and the Company was formed under the name Sterling Acquisition, Inc.
SECOND: The Certificate of Incorporation of the Company was filed with the
Department of State of the State of New York on January 15, 1992 under the
original name of Sterling Acquisition, Inc., which Certificate of Incorporation
was amended on June 4, 1992, restated, in its entirety, on December 20, 1995 and
amended on April 15 1998, January 26, 2000, February 8, 2000, February 10, 2000
and April 17, 2000 (as restated and amended, hereinafter referred to as the
"Certificate of Incorporation").
THIRD: The Certificate of Incorporation is hereby further amended to
increase the authorized number of shares of the Company's Common Stock, par
value $0.01 per share, from 50,000,000 shares to 150,000,000 shares and the
first paragraph of Article 4 of the Certificate of Incorporation is hereby
restated, in its entirety, to read as follows:
"FOURTH: The Company is authorized to issue two classes of shares of
capital stock, to be designated, respectively, as Preferred Stock and Common
Stock. The total number of shares of capital stock that the Company is
authorized to issue is 155,000,000. The total number of shares of Common Stock
which the Company shall have the authority to issue is 150,000,000 shares, par
value $0.01 per share. The total number of shares of Preferred Stock which the
Company shall have the authority to issue is 5,000,000 shares, par value $0.01
per share."
FOURTH: The foregoing amendment to the Certificate of Incorporation was
authorized by: (i) the unanimous affirmative vote of the Board of Directors of
the Company at a meeting of the directors duly called and held on April 29, 2002
and (ii) the affirmative vote of the holders of a majority of the votes entitled
to be cast thereon by the holders of the outstanding shares of the Company's
capital stock at the Annual Meeting of the Shareholders duly called and held on
July 11, 2002.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, the undersigned, Chairman of the Board and Secretary of
the Company, have each executed this Certificate of Amendment of the Certificate
of Incorporation of the Company as of July 11, 2002, and each hereby affirms,
under the penalties of perjury, that the statements contained herein are true.
/s/ Alan Cohen, O.D.
-------------------------------
Name: Alan Cohen, O.D.
Title: Chairman of the Board
/s/ Christopher G. Payan
-------------------------------
Name: Christopher G. Payan
Title: Co-Chief Operating Officer,
Senior Vice President, Chief
Financial Officer, Secretary
and Treasurer
-2-
Exhibit 10.17
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of the 11th day of February, 2002, is between
Emerging Vision, Inc., a New York corporation having an office at 100 Quentin
Roosevelt Boulevard, Garden City, New York 11530 ("EVI"), and Christopher G.
Payan, an individual residing at 612 White Avenue, New Hyde Park, New York 11040
(the "Employee").
W I T N E S S E T H:
-------------------
WHEREAS, on July 2, 2001, effective July 16, 2002, EVI and the Employee
entered into that certain Employment Agreement (the "Original Agreement")
pursuant to which EVI agreed to employ the Employee for a period of two years,
commencing July 16, 2001; and WHEREAS, EVI desires to continue to employ the
Employee, on its own behalf and on behalf of each of its existing and future
subsidiaries, whether partially or wholly owned (each a "Subsidiary";
collectively, the "Subsidiaries"; and, together with EVI, hereinafter
collectively referred to as the "Company"), and the Employee desires to be
employed by EVI upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, EVI and the Employee
hereby agree as follows:
1. Term of Employment. EVI hereby employs the Employee to render services
to the Company in the executive positions and with the executive duties and
responsibilities described in Section 3 hereof, commencing as of the date hereof
(the "Effective Date") and continuing thereafter until February 10, 2005, unless
earlier terminated in accordance with the provisions of Sections 2 or 5 hereof,
or extended by EVI in accordance with the provisions of Section 2 hereof. For
purposes of this Agreement, the "Term of Employment" shall be the three (3) year
period commencing on the Effective Date, subject to earlier termination
(pursuant to the provisions of Sections 2 or 5 hereof), or extension and renewal
(pursuant to the provisions of Section 2 hereof).
2. Renewal Term. It is expressly understood and agreed that EVI shall have
the sole right and option to extend the Term of Employment for two (2)
additional, successive periods of one (1) year each, by written notice given to
the Employee not less than one hundred eighty (180) days prior to the expiration
of the then current Term of Employment, it being specifically understood and
agreed that in the event EVI does not so notify the Employee, in writing, of its
election to renew the then current Term of Employment, this Agreement shall
expire as of the expiration date of the then current Term of Employment. With
respect to the foregoing, it is specifically understood and agreed that, in the
event EVI shall so elect to renew the then current Term of Employment, the
Employee may, at any time during such renewal Term of Employment, elect to
terminate this Agreement by serving upon EVI not less than sixty (60) days'
prior written notice thereof.
3. Position, Duties, Responsibilities.
(a) Position. The Employee hereby accepts such employment and agrees to
serve: (i) as a Senior Vice President and Co-Chief Operating Officer of EVI, as
well as EVI's Chief Financial Officer, Secretary and Treasurer; (ii) as the
Senior Vice President, Chief Financial Officer, Secretary and Treasurer of each
of EVI's Subsidiaries (other than its Subsidiary, VisionCare of California);
and/or (iii) from time to time, in such other and/or additional executive
position(s) as the Board of Directors (the "Board") of EVI, at any time and/or
from time to time, may designate; provided, however, that the duties associated
with such other and/or additional position(s) shall be of an executive nature
and substantially the same as those duties contemplated to be rendered pursuant
to this Agreement. The Employee shall devote his best, good faith efforts and
his full business time and attention to the performance of the services
customarily incidental to such offices and to such other services, of an
executive nature, as may be reasonably requested by the Board. EVI (acting
through its Board) shall retain full direction and control over the means and
methods by which the Employee shall perform the above services and of the
place(s) at which such services are to be rendered; provided, however, that it
is expressly understood and agreed that the Employee: (i) shall be required to
report to the members of the Executive Committee of the Board, until such time
as the Board shall appoint/elect a new President and/or Chief Executive Officer
of EVI, after which time the Employee shall report to such President and/or
Chief Executive Officer; and (ii) shall not be required to (but may, at his
option) relocate his personal residence outside of the New York metropolitan
area; provided, however, that it is specifically understood and agreed that in
the event EVI, at any time during the Term of Employment, in its sole and
absolute discretion, shall, by written notice given to the Employee (the
"Relocation Notice"), require the Employee to permanently perform substantially
all of the services (required of him hereunder) at an alternate location which
is in excess of thirty-five (35) driving miles (taking the shortest route
possible) from his existing residence (located in New Hyde Park, New York) then,
and in such event, the Employee, within a maximum period of sixty (60) days
after his receipt of such Relocation Notice, shall have the right to elect to
terminate this Agreement, by written notice given to EVI.
(b) Other Activities. Except upon the prior written consent of the Board,
and except for passive investments in non-optical related businesses and/or
ventures, the Employee, during the Term of Employment, will not: (i) accept any
other employment; (ii) serve on the board of directors of any other corporation
(including, but not limited to, any civic, professional, educational or
charitable organization or governmental entity or trade association); or (iii)
engage, directly or indirectly, in any other business activity (whether or not
pursued for remuneration, consideration, compensation and/or pecuniary
advantage) including, but not limited to, the rendering of consulting,
accounting and/or financial services.
4. Salary, Benefits, Expenses.
(a) Salary. In consideration of the services to be rendered hereunder, the
Employee, commencing as of February 11, 2002 and continuing throughout the Term
of Employment, shall be paid a salary computed at the rate of One Hundred
Seventy Five Thousand Dollars (U.S.) ($175,000) per annum, payable in
substantially equal, semi-monthly installments.
(b) Benefits and Other Arrangements. In addition to the salary set forth in
Subsection 4(a) hereof, the Bonus, if any, set forth in Subsection 4(h) below,
and the other compensation and/or benefits to be provided to the Employee
hereunder, the Employee shall be entitled to participate in any plan,
arrangement or policy of EVI providing for medical and/or dental insurance
benefits, 401(k) plan benefits, pension plan benefits and sick leave on
substantially the same terms as are then generally made available to the other
executives of EVI.
2
(c) Vacation. The Employee shall be entitled to a three (3) week, paid
vacation during each year of the Term of Employment (as well as the Term of
Employment, through and including February 10, 2002, under the Original
Agreement), such vacation to: (i) accrue at the rate of 1.25 days per month
during each year of such Terms of Employment; and (ii) be subject to EVI's
general policies, as the same may be amended from time to time; provided,
however, that the Employee shall submit to any member of the Executive Committee
of the Board all requests for vacation time, which shall be subject to the
approval of at least one (1) member thereof, and (iii) the Employee, unless
otherwise agreed to, in writing, by the members of such Committee, shall be
required to use (take) such vacation in the year earned, commencing with the
2003 calendar year. With respect to the foregoing, it is understood and agreed
that in the event the employment of the Employee shall cease at a time when the
Employee has earned, but has not used, vacation days, compensation, in an amount
equal to the vacation pay to which the Employee shall be entitled hereunder
(including those vacation days to which the Employee is entitled pursuant to the
Original Agreement), shall be paid, by EVI to the Employee (based upon the
salary then payable to the Employee pursuant to Subsection 4(a) hereof), within
ten (10) business days thereafter. This provision shall survive the expiration
or sooner termination of this Agreement.
(d) Automobile Allowance. In addition to the salary set forth in Subsection
4(a) above, EVI shall pay to the Employee, each month during the Term of
Employment, an automobile allowance, in the amount of Six Hundred ($600) Dollars
per month (or the pro-rata portion thereof, if less than a full month).
(e) Expenses. The Employee shall be entitled to prompt reimbursement from
EVI (and EVI hereby agrees to pay) for all ordinary and necessary business
expenses incurred in the performance of his duties hereunder, subject to EVI's
receipt of reasonable substantiation and/or reasonable documentation thereof.
This provision shall survive the expiration or sooner termination of this
Agreement.
(f) Acceleration of Vesting Schedule of Existing Options. In partial
consideration of the Employee entering into this Agreement, EVI and the
Employee, simultaneously with the execution hereof, shall enter into that
certain Amendment No. 1 to Non-Qualified Stock Option Agreement annexed hereto
as Exhibit A, pursuant to which the vesting schedule, as presently contained in
the Non-Qualified Stock Option Agreement between EVI and the Employee, dated as
of July 16, 2001, shall be accelerated.
(g) Option Grant. In further partial consideration for the Employee's
execution and delivery of this Agreement, EVI is, simultaneously herewith,
granting to the Employee additional stock options, under its 1995 Stock
Incentive Plan, to purchase up to an aggregate of one hundred fifty thousand
(150,000) shares of EVI's Common Stock, par value $0.01 per share (the "Common
Stock"), at a price per share equal to the composite closing price of EVI's
Common Stock on February 11, 2002 ($0.075), all in accordance with the terms set
forth in the form of Stock Option Agreement, annexed hereto as Exhibit B, to be
executed and delivered by the Employee and EVI simultaneously with the execution
hereof.
3
(h) Bonus.
(i) In addition to the salary to become payable to the Employee pursuant to
Subsection 4(a) hereof, the Employee, subject to the terms and conditions
hereof, shall also be entitled to receive from EVI a bonus for each calendar
year or portion thereof included within the Term of Employment, equal to five
percent (5%) of the Company's consolidated EBITDA (as hereinafter defined) for
each such calendar year or portion thereof included within the Term of
Employment (the "Bonus"); provided, however, that: (x) no Bonus shall be payable
under this Subsection 4(h)(i) with respect to any such calendar year in which
the Company's EBITDA is less than Two Million Dollars ($2,000,000) (the
"Threshold Amount"), which Threshold Amount shall be pro-rated (reduced) for
periods of less than a full year; (y) if the Company's EBITDA with respect to
any calendar year (or the pro rata portion thereof, if less than a full calendar
year) during the Term of Employment is equal to or greater than the Threshold
Amount, the Bonus shall be calculated from the first dollar of EBITDA in excess
of the Threshold Amount; it being understood that, with respect to any calendar
year not falling entirely within the Term of Employment, the Threshold Amount
shall be a pro rata portion of the Threshold Amount based on: (x) the number of
full quarterly periods (ending March 31, June 30, September 30 and December 31)
actually falling within the Term of Employment; plus (y) the immediately
succeeding quarterly period (e.g., the quarterly period during which the Term of
Employment shall expire or terminate; hereinafter collectively referred to as
the "Stub Period").
(ii) For purposes hereof, the term "EBITDA" shall mean the Company's
consolidated earnings from continuing operations, before all interest, taxes,
depreciation, amortization, non-cash equity compensation charges and non-cash
impairment and similar charges for the year in question (or, if less than a full
calendar year, the number of full quarterly periods included within the Stub
Period) determined in accordance with generally accepted accounting principles
consistently applied, as audited and reported upon, with respect to full years,
or reviewed, with respect to less than full year periods, as the case may be, by
the independent certified public accountants of EVI, except that the net profit
or loss of any entity, substantially all of the assets or equity interests of
which are hereafter acquired by EVI or any Subsidiary, in any manner, accrued or
realized by any such entity prior to the date of each such acquisition by EVI or
any of its Subsidiaries, shall be excluded.
(iii) For purposes hereof, with respect to the calendar year ending
December 31, 2002, the Company's EBITDA shall be determined for the period from
April 1, 2002 until December 31, 2002.
(iv) For purposes hereof, with respect to the calendar year in which this
Agreement shall expire or terminate (the "Termination Year"), the Company's
EBITDA shall be determined for the period from the first day of the Termination
Year until the last day of the Stub Period.
(v) The Bonus shall be payable, in a lump sum, promptly following the
determination of the amount thereof, if any, but not later than one hundred
(100) days following December 31 of each year with respect to which a Bonus is
payable; provided, however, that with respect to the Termination Year, the Bonus
shall be payable, in a lump sum, within a maximum period of thirty (30) days
following the date that such Term of Employment shall terminate or expire (the
"Termination Date") or, if later, ten (10) days following the filing date of the
4
SEC periodic report of the Company relating to the final full quarterly period
occurring within the Stub Period but, in no event, more than sixty (60) days
from the last date (including any available extensions) that EVI was required to
file, with the SEC, any such report; and this provision shall survive the
expiration or sooner termination of this Agreement.
(vi) With respect to each calendar year for which a Bonus may be payable
hereunder, EVI covenants and agrees that, in the event it shall change its
accounting year end, such year end shall, for purposes hereof, nevertheless be
deemed to be December 31.
4. Termination.
(a) The employment of the Employee hereunder may be terminated by EVI on
not less than thirty (30) days' prior written notice to the Employee in the
event that the Employee is determined to be permanently disabled. As used in
this Section, the Employee shall be deemed to be "permanently disabled" if the
Employee has been substantially unable to discharge his duties and obligations
hereunder, by reason of illness, accident or disability, for a period of thirty
(30) or more consecutive days. In the event the employment of the Employee is
terminated because of a permanent disability, the Employee shall receive (net of
all benefits payable to the Employee under any policy of disability insurance
provided to the Employee) compensation (including, but not limited to, the
salary, automobile allowance and Bonus, if any, accrued and payable, to the
Employee, pursuant to the provisions of Section 4 hereof) until the date which
is three (3) months after the date on which the Employee first became disabled,
payable at the rate and on the terms provided for herein as if he had not been
terminated. With respect to the foregoing, it is expressly understood and agreed
that in the event the payor of any such disability insurance benefits
(including, but not limited to, the Sate of New York) shall refuse and/or
decline to pay such benefits to the Employee, EVI shall, promptly following its
receipt of written notice thereof, from such payor, reimburse the Employee for
all such benefits not otherwise required to be paid, to the Employee, pursuant
to the provisions of this Subsection 5(a).
(b) The employment of the Employee hereunder may be terminated by EVI for
"Cause," at any time during the Term of Employment, upon the Employee's receipt
of written notice from EVI documenting that: (i) the Employee has been convicted
of, or pleaded no lo contendre to, a felony or other serious crime or a crime
involving moral turpitude; (ii) the Employee has stolen and/or misappropriated
Company assets and/or property (other than unsubstantial or inadvertent acts);
(iii) the Employee has used illegal substances and/or has been intoxicated while
performing his duties hereunder more than one (1) time during the Term of
Employment; (iv) the Employee has assaulted or sexually abused another employee
of the Company; (v) the Employee has intentionally falsified any report or
expense reimbursement form submitted by him to EVI; (vi) the Employee has
breached any of the terms and/or provisions of this Agreement and such default
shall have continued for a period in excess of twenty (20) days from the date of
the Employee's receipt of written notice thereof; or (vii) in the opinion of a
majority of the members of EVI's Board, the Employee shall have: (x)
intentionally and/or willfully refused or failed to perform, or demonstrated
gross negligence in the performance of, his assigned duties hereunder, other
than any such failure resulting from the Employee's incapacity due to illness or
injury; or (y) committed an intentional, wrongful disclosure of any of the
Company's trade secrets and/or confidential information; or (z) breached his
fiduciary duties to EVI and/or any of its Affiliates.
5
With respect to the foregoing, it is expressly understood that no act or
failure to act on the part of the Employee shall give rise to EVI's right to
terminate this Agreement (pursuant to this Subsection 5(b)), if such act or
failure to act was due primarily to an error in judgment and/or negligence (but
not gross negligence) on the part of the Employee.
(c) The employment of the Employee hereunder may be terminated by EVI,
without cause and for any reason whatsoever, on not less than thirty (30) days
prior written notice to the Employee.
(d) The employment of the Employee hereunder shall automatically be deemed
terminated on the date of the Employee's death.
(e) The employment of the Employee hereunder may be terminated, by the
Employee, on not less than sixty (60) days' prior written notice to EVI, in the
event: (i) EVI shall elect to renew the then current Term of Employment
(pursuant to the provisions of Section 2 hereof); or (ii) EVI shall require the
Employee to perform the duties (required of him hereunder) at an alternate
location situated more than 35 miles away form his present residence (pursuant
to the provisions of Subsection 3 (a) hereof).
(f) The employment of the Employee hereunder may be terminated, by the
Employee, on not less than sixty (60) days' prior written notice given to EVI
within a maximum period of ninety (90) days after a "change of control of EVI",
it being understood that, for purposes of this Subsection 5(f), the term,
"change of control of EVI", shall be defined as:
(i) The acquisition: (x) by any individual not presently, and/or then, an
officer, director or shareholder of EVI; or (y) by any entity or group (within
the meaning of subsection 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), none of the officers, directors and/or
shareholders of which are, as of the date hereof (and/or are then) an officer,
director or shareholder of EVI (each such individual, entity or group being
hereinafter referred to as a "Person") of beneficial ownership (within the
meaning of Rule 13D-3 promulgated under the Exchange Act) of 51% or more of
either (A) the then outstanding shares of Common Stock of EVI, or (B) the
combined voting power of the then outstanding voting securities of the EVI
entitled to vote generally in the election of directors; provided, however, that
for purposes of this Subsection 5(f)(i), the following acquisitions shall not
constitute a change of control of EVI: (1) any acquisition directly from EVI;
(2) any acquisition by the Company; or (3) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company; or
(ii) The consummation of a merger and/or consolidation with or into, or
sale or other transfer of all or substantially all of the assets of the Company
to, a Person.
(g) If the Employee's employment is terminated by EVI (as opposed to the
expiration of the Term of Employment pursuant to, and in accordance with, the
provisions of Sections 1 or 2 hereof):
6
(i) pursuant to Subsection 5(a) hereof, the Employee shall be entitled to,
and EVI's obligation hereunder shall be limited to, the payment of all
compensation (including, but not limited to, salary and Bonus, if any) accrued
under each of the provisions of Section 4 hereof, to the date specified therein;
(ii) pursuant to Subsection 5(b) hereof, the Employee shall be entitled to,
and EVI's obligation hereunder shall be limited to, the payment of all
compensation accrued under each of the provisions of Section 4 hereof other
than, and expressly excluding, the provisions of Subsection 4(h) hereof, to the
effective date of any such termination;
(iii) pursuant to Subsections 5(c) or 5(f) hereof, the Employee shall be
entitled to, and EVI's obligation hereunder shall be limited to, the payment of
: (x) all compensation (including, but not limited to, salary and Bonus, if any)
accrued under each of the provisions of Subsection 4 hereof, to the effective
date of any such termination; plus (y) an amount equal to the salary otherwise
payable, to the Employee, pursuant to the provisions of Subsection 4 (a) hereof,
for the ensuing one (1) year period or such lesser period of time (from and
after the effective date of any such termination) as may then be remaining on
the then current Term of Employment but, in any event, not less than six (6)
months (the "Severance Amount"), which Severance Amount shall be paid by EVI to
the Employee, without interest, in six (6) equal, consecutive monthly
installments commencing on the first day of the month following the month in
which the effective date, of any such termination, shall occur (the "Severance
Payment Period");
(iv) pursuant to Subsections 5(d) or Subsection 5(e) hereof, the Employee
shall be entitled to, and EVI's obligation hereunder shall be limited to, the
payment of all compensation (including, but not limited to, salary and Bonus, if
any) accrued under each of the provisions of Section 4 hereof, to the effective
date of any such termination.
6. Confidentiality.
(a) The Employee shall not, during the Term of Employment or at any time
thereafter, use (other than in the performance of his duties to the Company) or
disclose to any person, firm or corporation (except as required by law or with
the prior written approval of EVI) any confidential information concerning the
business, inventions, discoveries, clients, affairs or other trade secrets of
the Company that he may have acquired in the course of, or as an incident to,
his employment by EVI.
(b) The obligations of confidentiality and non-use set forth in Subsection
6(a) above shall not apply to information: (i) which is or becomes published in
any written document or otherwise is or becomes a part of the public domain
without breach of the aforementioned obligation by the Employee; (ii) which the
Employee can establish was already in his possession and not subject to a
secrecy obligation at the time he encountered such information in the course of,
or as an incident to, his employment by EVI; or (iii) was generally available,
to the public, prior to the date hereof. Specific information shall not be
deemed published or otherwise in the public domain, or in the Employee's prior
possession, merely because it is encompassed by some general information
published, or in the public domain, or in the Employee's prior possession.
7
(c) As a material inducement to EVI in entering into this Agreement, and
expressly in partial exchange for the performance of EVI's obligations under
this Agreement, the Employee hereby covenants and agrees that, during the Term
of Employment and for a period of twelve (12) months following the termination
thereof: (x) for any reason, other than by EVI, pursuant to the provisions of
Subsection 5(c) or 5(f) hereof; or (y) by EVI, pursuant to the provisions of
Subsection 5(c) or 5(f) hereof, then, provided EVI shall not then be in default
in the performance of its obligation to make the payments to be made pursuant to
the provisions of Subsection 5(g) (iii) hereof, he will not, either on his own
account, or directly or indirectly in conjunction with or on behalf of any
person, firm or entity (other than by reason of the Employee's equity ownership
in any publicly traded firm or corporation, provided that such equity ownership
shall not confer upon the Employee the right or ability to influence or direct,
directly or indirectly, the management of the business and/or affairs of any
such firm or corporation):
(i) Solicit or employ, directly or indirectly, any person who is then or
has, within the six (6) month period prior thereto, been an officer, director or
employee of the Company, whether or not such a person would commit a breach of
his or her contract of employment, if any, by reason of leaving the service of
the Company;
(ii) Solicit the business of any person, firm or company which is then, or
has been, at any time during the preceding six (6) month period prior to such
solicitation, a customer, client, contractor, supplier or agent of the Company;
or
(iii) Provided the employment of the Employee has been terminated for cause
pursuant to Subsection 5(b) hereof, carry on or be engaged, concerned or
interested in, or devote any material time to the affairs of, any trade or
business engaged in, by the Company, as of the effective date of the termination
of such employment, for a period of six (6) months from and after such effective
date of termination.
7. Notices. Any notice, request, claim, demand or other communication
hereunder to any party shall be effective upon receipt (or refusal of receipt)
and shall be in writing and delivered personally (including deliveries by
express, overnight courier service) or sent by certified or registered mail,
return receipt requested, postage prepaid, as follows:
(a) If to EVI, addressed to EVI's principal executive offices, to the
attention of its General Counsel, with a copy to be simultaneously delivered to
the Chairman of its Board; or
(b) If to the Employee, to him at the address set forth above, with a copy
to be simultaneously delivered to Steven J. Kuperschmid, Esq., Certilman Balin
Adler & Hyman, 90 Merrick Avenue, East Meadow, New York 11554; or
(c) At any such other address as either party shall have specified by
written notice given to the other as herein provided.
8. Entire Agreement. The terms of this Agreement and the specific portions
of the Original Agreement specified herein are intended by the parties, as of
the date hereof, to be the final expression of their agreement with respect to
the employment of the Employee by EVI, and may not be contradicted by evidence
8
of any prior or contemporaneous agreement. All respective obligations of the
Company and the Employee hereunder which, by their terms, are required to be
performed and/or observed following the expiration or sooner termination of this
Agreement, shall survive such expiration or termination.
9. Amendments; Waivers. This Agreement may not be modified, amended or
terminated except by an instrument, in writing, signed by the Employee and by
EVI's Chairman of the Board, Chief Executive Officer or President. By an
instrument in writing similarly executed, either party may waive compliance by
the other party with any provision of this Agreement that such other party was
or is obligated to comply with or perform; provided, however, that such waiver
shall not operate as a waiver of, or estoppel with respect to, any other or
subsequent failure. No failure to exercise, and no delay in exercising, any
right, remedy or power hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, remedy or power hereunder preclude
any other or further exercise thereof or the exercise of any other right, remedy
or power provided for herein, or by law, or in equity.
10. Severability; Enforcement. If any provision of this Agreement, or the
application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions, as applied to other persons,
places and circumstances, shall remain in full force and effect.
11. Assignability.
(a) Subject to the provisions hereof, in the event that EVI shall merge or
consolidate with any other corporation, partnership or business entity, or all
or substantially all of EVI's business or assets shall be transferred, in any
manner, to any other corporation, partnership or business entity, such successor
shall thereupon succeed to, and be subject to, all rights, interests, duties and
obligations of, and shall thereafter be deemed for all purposes hereof to be,
EVI hereunder.
(b) This Agreement is personal in nature, and none of the parties hereto
shall, without the prior written consent of the other, assign or transfer this
Agreement or any of its or his rights or obligations hereunder, except by
operation of law or pursuant to the terms of this Section 11.
(c) Nothing expressed or implied herein is intended or shall be construed
to confer upon, or give to any person, other than the parties hereto, any right,
remedy or claim under, or by reason of, this Agreement, or of any term, covenant
or condition hereof.
12. Restrictive Covenant. To the extent that a restrictive covenant
contained herein may, at anytime, be more restrictive than permitted under the
laws of any jurisdiction where this Agreement may be subject to review and
interpretation, the terms of such restrictive covenant shall be those allowed by
law, and the covenant shall be deemed to have been revised accordingly.
13, Governing Law. The validity, interpretation, enforceability and
performance of this Agreement shall be governed by, and construed and enforced
in accordance with, the internal laws of the State of New York, without regard
to principles of conflict of laws.
9
14. Employee's Representation and Acknowledgment. This Employee hereby
represents that he is free to enter into this Agreement and is not under any
contractual restraint which would prohibit him from satisfactorily performing
his duties to the Company hereunder. The Employee also acknowledges: (i) that he
has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement, and has been advised to do
so by EVI; and (ii) that he has read and understands this Agreement, is fully
aware of its legal effects and has entered into it freely, based upon his own
judgment.
15. Arbitration. Any controversy between the Employee and EVI, or any
employee, director or stockholder of EVI, involving the construction or
application of any of the terms, provisions or conditions of this Agreement or
otherwise arising out of, or related to, this Agreement, shall be settled by
arbitration (to be conducted in either the Nassau County or New York City office
of the American Arbitration Association) in accordance with the then current
commercial arbitration rules of the American Arbitration Association, and: (i)
judgment on the award rendered by the arbitrator may be entered by any court
having jurisdiction thereof; and (ii) the substantially prevailing party, in any
such proceeding, shall be entitled to reimbursement of its/his reasonable
attorneys' fees, costs and/or expenses actually incurred in connection
therewith.
16. Termination of Original Agreement. Simultaneously with the
effectiveness hereof, the Original Agreement shall be deemed to be null, valid
and of no further force or effect except with respect to the respective
obligations and/or liabilities, of each of the parties thereto, arising and/or
accruing prior to such effective date hereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Employment
Agreement as of the date first written above.
EMERGING VISION, INC.
By: /s/ Dr. Alan Cohen
----------------------------
Name: Dr. Alan Cohen
Title: Chairman of the Board
EMPLOYEE:
By: /s/ Christopher G. Payan
----------------------------
Christopher G. Payan
10
Exhibit 21.1
LIST OF SUBSIDIARIES:
STERLING ADVERTISING, INC.
STERLING VISION OF MAIN PLACE, INC.
STERLING VISION OF HEMPSTEAD, INC.
STERLING VISION OF NORTHWAY MALL, INC.
STERLING VISION OF BATAVIA, INC.
STERLING VISION OF REGO PARK, INC.
STERLING VISION OF NORTH SHORE MART, INC.
STERLING VISION OF BAY STREET, INC.
STERLING VISION OF BRAMALEA, INC.
STERLING VISION OF HAMILTON, INC.
STERLING VISION OF LIME RIDGE, INC.
STERLING VISION OF KINGSTON, INC.
STERLING VISION OF BLUE HEN MALL, INC.
STERLING VISION OF LANDOVER, INC.
STERLING VISION OF MONDAWMIN, INC.
STERLING VISION OF PADDOCK MALL, INC.
STERLING VISION OF METRO NORTH, INC.
STERLING VISION OF FRANKLIN MALL, INC.
STERLING VISION OF TINLEY PARK, INC.
STERLING VISION OF EAU CLAIRE, INC.
STERLING VISION OF SENECA, INC.
STERLING ROSLYN CORP.
STERLING VISION OF WALDEN, INC.
STERLING VISION OF INDEPENDENCE, INC.
STERLING VISION OF ROTTERDAM, INC.
STERLING VISION OF FRANKLIN MILLS, INC.
STERLING VISION OF NEWBURGH, INC.
STERLING VISION OF BAY RIDGE, INC.
STERLING VISION OF WESTPORT, INC.
STERLING VISION OF DUNKIRK, INC.
STERLING VISION U.S.A., INC.
STERLING VISION OF CALIFORNIA, INC.
SITE FOR SORE EYES SACRAMENTO, INC.
SITE FOR SORE EYES ADVERTISING, INC.
STERLING VISION OF POTOMAC MILLS, INC.
STERLING VISION OF WHEATON PLAZA, INC.
STERLING VISION OF MID RIVERS, INC.
SVCI REAL ESTATE, INC.
STERLING VISION OF EAST ROCKAWAY, INC.
STERLING VISION OF NEWPARK, INC.
STERLING VISION OF NANUET, INC.
STERLING VISION OF DELAFIELD, INC.
STERLING VISION OF TOMS RIVER, INC.
1
LIST OF SUBSIDIARIES (Continued):
STERLING MANAGEMENT SERVICES, INC.
OPTI-PLEX OF NEW YORK, INC.
STERLING VISION OF ISLANDIA, INC.
STERLING VISION OF HAWTHORNE CENTER, INC.
STERLING VISION OF LEVITTOWN, INC.
STERLING VISION OF CHARLESTOWN, INC.
STERLING VISION OF SYOSSET, INC.
STERLING VISION OF CAPITOLA, INC.
STERLING VISION OF FOX RUN, INC.
STERLING VISION OF METRO N.Y., INC.
STERLING VISION OF ROSYLN, INC.
INSIGHT LASER CENTERS, INC.
INSIGHT LASER CENTERS, N.Y.I, INC.
INSIGHT LASER CENTERS NEW YORK II, LTD.
INSIGHT LASER CENTER N.C. II, INC.
STERLING VISION OF EAST MADISON, INC.
STERLING VISION OF HAGERSTOWN, INC.
STERLING BRYANT II CORP.
VISIONCARE OF CALIFORNIA, INC.
STERLING VISION OF WHITE FLINT, INC.
STERLING VISION OF CAMBRIDGE SQUARE, INC.
STERLING VISION OF CAPE GIRARDEAU, INC.
STERLING VISION OF EDISON, INC.
STERLING VISION OF NAPA, INC.
STERLING VISION OF LOS GATOS, INC.
STERLING VISION OF PRINCE GEORGES PLAZA, INC.
STERLING VISION OF TRACY, INC.
STERLING VISION OF COLUMBUS MILLS, INC.
STERLING VISION OF ONTARIO MILLS, INC.
STERLING VISION OF GREEN ACRES, INC.
STERLING VISION OF M.V., INC.
STERLING VISION OF SOUTHPARK, INC.
STERLING VISION OF NORTHPARK, INC.
STERLING VISION OF BREA, INC.
STERLING VISION OF BLASDELL, INC.
STERLING VISION OF SOUTHDALE, INC.
STERLING VISION OF WESTMINSTER, INC.
STERLING VISION OF FAIR OAKS, INC.
STERLING VISION OF NEWPORT BEACH, INC.
STERLING VISION OF FULTON ST., INC.
STERLING VISION DKM ADVERTISING, INC.
720 MARKET STREET REALTY CORPORATION
STERLING VISION OF SACRAMENTO, INC.
STERLING VISION OF FARGO, INC.
2
LIST OF SUBSIDIARIES (Continued):
STERLING VISION OF ANAHEIM, INC.
STERLING VISION OF EASTLAND, INC.
STERLING VISION OF GASTONIA, INC.
STERLING VISION OF KIRKWOOD MALL, INC.
STERLING VISION OF BLUEFIELD, INC.
STERLING VISION OF GREEN BAY, NC.
STERLING VISION OF KENNEDY BLVD., INC.
STERLING VISION OF WEST BEND, INC.
STERLING VISION OF WEST MADISON, INC.
STERLING VISION DKM OF SHEBOYGAN, INC.
STERLING VISION OF KENOSHA, INC.
STERLING VISION OF HAMPTON, INC.
STERLING VISION OF FORESTVILLE, INC.
STERLING VISION OF FOND DU LAC, INC.
STERLING VISION OF FNR, INC.
STERLING LABORATORIES, INC.
STERLING VISION OF BASHFORD MANOR, INC.
STERLING VISION OF RIVERSIDE, INC.
STERLING VISION OF PALISADES, INC.
STERLING VISION OF DULLES, INC.
STERLING VISION OF LIGHT STREET, INC.
STERLING VISION OF PENN CENTER, INC.
SINGER SPECS ADVERTISING, INC.
STERLING VISION OF COLLINGTON PLAZA, INC.
INSIGHT TOTAL MANAGED CARE, INC.
STERLING VISION OF 78TH STREET, INC.
STERLING VISION OF DENVER, INC.
INSIGHT IPA OF NEW YORK, INC.
INSIGHT AMSURG CENTERS, INC.
STERLING VISION OF JERSEY GARDENS, INC.
STERLING VISION OF SHOPPINGTOWN, INC.
STERLING VISION OF CAMP HILL, INC.
STERLING VISION OF GREAT NORTHERN, INC.
STERLING VISION OF THE FALLS, INC.
STERLING VISION OF OWINGS MILLS, INC.
STERLING VISION OF MACARTHUR CENTER, INC.
STERLING VISION OF MONTGOMERY, INC.
STERLING VISION OF CONCORD MILLS, INC.
STERLING VISION OF JAMESTOWN MALL, INC.
STERLING VISION OF ORLANDO, INC.
STERLING VISION OF BEAVER DAM, INC.
STERLING VISION OF APPLETON, INC.
STERLING VISION OF COLUMBIA MALL, INC.
3
LIST OF SUBSIDIARIES (Continued):
STERLING VISION OF 794 LEXINGTON, INC.
INSIGHT LASER CENTERS OF BAY TERRACE, INC.
STERLING VISION OF SEACLIFF VILLAGE, INC.
INSIGHT LASER CENTERS OF KING OF PRUSSIA, INC.
STERLING VISION OF ANNAPOLIS, INC.
STERLING VISION OF APACHE, INC.
STERLING VISION OF MAMARONECK, INC.
4
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into Emerging Vision, Inc.'s
previously filed Registration Statements File Nos. 333-33355, 333-41400 and
333-100697.
/s/ Miller Ellin & Company LLP
New York, New York
March 28, 2003
Exhibit 99.1
Certifications of Principal Executive Officers and Principal Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------
(Company Letterhead)
Certification of Principal Executive and Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Christopher G. Payan, Co-Chief Operating Officer and Chief Financial
Officer (co-principal executive officer and principal financial officer) of
Emerging Vision, Inc. (the "Registrant"), certify that to the best of my
knowledge, based upon a review of the Annual Report on Form 10-K for the year
ended December 31, 2002 of the Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
/s/ Christopher G. Payan
---------------------------------
Name: Christopher G. Payan
Date: March 28, 2003
(Company Letterhead)
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Myles S. Lewis, Co-Chief Operating Officer (co-principal executive
officer) of Emerging Vision, Inc. (the "Registrant"), certify that to the best
of my knowledge, based upon a review of the Annual Report on Form 10-K for the
year ended December 31, 2002 of the Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
/s/ Myles S. Lewis
---------------------------------
Name: Myles S. Lewis
Date: March 28, 2003
(Company Letterhead)
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Samuel Z. Herskowitz, Co-Chief Operating Officer (co-principal executive
officer) of Emerging Vision, Inc. (the "Registrant"), certify that to the best
of my knowledge, based upon a review of the Annual Report on Form 10-K for the
year ended December 31, 2002 of the Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
/s/ Samuel Z. Herskowitz
----------------------------------
Name: Samuel Z. Herskowitz
Date: March 28, 2003